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Sri Lankan Resus Energy renewable firm given A+(lka) rating by Fitch

ECONOMYNEXT – Fitch Ratings said it had given an ‘A+(lka) rating with a stable outlook to Resus Energy, a renewable power firm.

“Resus’s rating reflects its cash flow visibility from fixed long-term contracts and the increasing balance between hydro and solar assets, which will mitigate operational volatility arising from climatic conditions,” the rating agency said.

“This is offset by Resus’s small scale, high counterparty risk, customer concentration and moderate financial profile.”

The rating agency said, Resus’s scale will remain small even when installed capacity doubles to 29 Mega Waltz by 2023 (FY21: 14.5MW), although the expansion should support 30 percent revenue growth a year over the next two years however, it views the company’s increased diversification into solar favorably, as it will mitigate the current overreliance on hydro.

“We believe the long-term power purchase agreements (PPAs) for the group’s plants offer price certainty and long-term cash flow visibility, we also believe the risk of non-renewal of PPAs is remote, as renewals, specifically of hydro power plants is mandated by law. The current supply shortage in the country should also help renewals.” the rating agency said.

The full statement is re produced below;

Fitch Assigns Sri Lanka’s Resus Energy PLC First-Time
‘A+(lka)’ National Rating; Outlook Stable

Fitch Ratings – Colombo – 09 Nov 2021: Fitch Ratings has assigned Sri Lankan power
producer Resus Energy PLC a National Long-Term Rating of ‘A+(lka)’. The Outlook is
Stable.

Resus’s rating reflects its cash flow visibility from fixed long-term contracts and the
increasing balance between hydro and solar assets, which will mitigate operational
volatility arising from climatic conditions. This is offset by Resus’s small scale, high
counterparty risk, customer concentration and moderate financial profile.

KEY RATING DRIVERS

High Counterparty Risk: Resus sells all its power generation to state-owned Ceylon
Electricity Board (CEB, AA- (lka)/Stable), which is the country’s sole electricity transmitter.
CEB has a weak standalone credit profile and is rated at the same level as the sovereign
(CCC), reflecting our assessment of very strong likelihood of support given the essential
service it provides. However, the weakening financial position of the state and CEB has led
to payment delays to power generators, including Resus.

We expect Resus’s receivable days to increase to 160 days in the next couple of years, from
152 days as of 31 March 2021 (FY21). Resus saw an improvement in receivable days to
around 145 by September 2021 amid bulk payments from CEB. However, further
weakening in CEB’s financial profile during the year from rising oil and coal prices, which it
cannot pass on to end-customers, is likely to lead to higher receivables. Oil and coal
account for around 60% of the country’s power generation.

Small Scale: Resus’s scale will remain small even when installed capacity doubles to 29MW
by FY23 (FY21: 14.5MW), although the expansion should support 30% revenue growth a
year over the next two years. Resus accounts for only 0.3% of the country’s installed power
capacity and generation, and we do not expect a significant improvement in the
contribution in the next few years despite the capacity additions. We also believe the small
scale could affect Resus’s bargaining power with counterparties and its ability to receive
timely payments compared with larger operators.

Improving Diversification: We view the company’s increased diversification into solar
favourably, as it will mitigate the current overreliance on hydro (85% of the installed
capacity). This should help reduce the operational volatility stemming from adverse
weather conditions. Historically, Resus’s hydro plant factors have varied between 20% and
40%. Solar will account for 50% of Resus’s installed capacity by FY23, balancing its asset
base.

Price Certainty, Volume Risk: We believe the long-term power purchase agreements
(PPAs) for the group’s plants offer price certainty and long-term cash flow visibility. Resus’s
entire asset base is secured with PPAs with tenors of 15-20 years and the remaining PPA
life for most plants, except two (totalling 4.6MW), is more than 10 years.

We also believe the risk of non-renewal of PPAs is remote, as renewals, specifically of
hydro power plants is mandated by law. The current supply shortage in the country should
also help renewals. The PPAs provide protection from price risk, but not against volumes,
as it is based on resource availability.

Stable Leverage: We expect Resus’s leverage, defined as net debt/EBITDA, to remain
around 4.0x-4.5x (FY21: 4.6x) in the next few years, helped by increasing cash flow from
new projects that will offset the company’s capex needs. The company is expected to invest
LKR1.6 billion in FY22 to complete its 12MW solar expansion, leading to a temporary spike
in leverage to 5.4x. The company post-FY22 does not have any confirmed projects lined up,
but we have assumed annual capex of around LKR700 million to account for possible
expansions.

Expanding EBITDA Margins: We expect Resus’s EBITDA margin to improve to around 83%
in the next few years, from 80% in FY22, helped by the shift in the revenue mix towards
solar. Solar margins are around 5-7 percentage points higher than hydro owing to better
tariffs and lower operating costs. The plant factors of some of the hydro plants should
improve because of the upgrade of the transmission grid enabling higher dispatch. This
should drive a modest margin improvement in hydro as well.

DERIVATION SUMMARY
Resus is rated one notch below local cable manufacturer Sierra Cables PLC (AA-
(lka)/Negative) to reflect the high counterparty risk stemming from its exposure to CEB
and large though manageable refinancing requirements. Sierra’s liquidity is relatively more
comfortable with cash at hand covering near-term contractual maturities. However,
Sierra’s cash flow is more cyclical than Resus’s owing to its exposure to the construction
and infrastructure sectors, and its Negative Outlook reflects rising working-capital
pressures.

Resus is rated multiple notches below leading domestic power producer and engineering,
procurement and construction company Lakdhanavi Limited (AA+(lka)/Stable), on account
of the latter’s large operating scale and geographic and business diversification. Lakdhanavi
generates around 60% of its gross profit from CEB, but this counterparty risk is reduced to
a large extent by its cash flow (35% gross profit) from the Bangladesh Power Development
Board (BPDB), which is owned by the government of Bangladesh (BB-/Stable). We believe
CEB will prioritise payments to Lakdhanavi given its role as the operation and maintenance
provider for one of the largest power plants in the country, and because of its investments
in LNG power plants, which are critical for CEB’s future strategy. We expect both
companies to see leverage spike in the short term amid significant investments.

KEY ASSUMPTIONS
Fitch’s Key Assumptions Within Our Rating Case for the Issuer:

– Revenue to grow around 30% per annum over the next two years amid new capacity
additions;

– EBITDA margin to expand around 350bp to 84% in the next two years amid increased
contribution from the high-margin solar segment, which will more than offset the PPA
renewals for certain hydro plants at lower tariffs;

– Net working-capital cycle to expand by around 10 days to 175 to reflect potential delays
in collecting CEB receivables;

– Capex spend of LKR1.6 billion in FY22 and LKR700 million a year from FY23 onwards to
fund the capacity expansion;

– Dividend payout of LKR80 million a year over FY22-FY25

RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:

– Material increase in scale while maintaining net debt/EBITDA below 4.0x on a sustained
basis.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

– Net debt/EBITDA above 5.0x on a sustained basis;

– Coverage, defined as EBITDA/interest paid, below 2.0x on a sustained basis;

– Significant and prolonged deterioration of the receivable position due to increased
counterparty risk.

LIQUIDITY AND DEBT STRUCTURE
Large Debt Maturities: Resus had LKR4 million unrestricted cash available at end-June
2021 to meet LKR820 million of debt maturing in the next 12 months. Around LKR450
million of Resus’s debt maturities are short-term working-capital lines, which we expect
will be rolled over by banks. Resus expects to meet the remaining contractual maturities of
LKR370 million through already negotiated refinancing facilities, unused credit lines of
LKR25 million and by issuing commercial paper to the tune of LKR250 million.

We believe Resus’s ability to raise commercial paper will depend on market conditions and
prevailing interest rates, which have been on an upward trend. Resus’s refinancing
capabilities remain adequate, as most banks are willing to provide longer-tenured facilities
for the company’s operating power plants that have more than 10 years remaining under
their PPAs.

ISSUER PROFILE

Resus is a small-scale power producer in Sri Lanka with an expanding portfolio of assets.
The company had an installed capacity of 14.5MW, spread across hydro (12.5MW) and
solar (2MW), as of 31 March 2021.

DATE OF RELEVANT COMMITTEE
26 October 2021

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