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Will Debt recast plan brings cheer for power companies

, October 4, 2012, 0 Comments

A critical look at recent measures announced by government in power sector and its after effect. What more needs to be done and how power saga unfolds.

he reformist measures by the government to restructure debt of cash-strapped state- owned power distribution companies is welcomed and in context of power sector reform, seen improving the overall health of the ailing power sector but, Is govt’s debt recast plan will bring in cheers for power generation companies? let us analyze.

As proposed by Center, The state governments will take over 50% of distribution companies short-term loans up to Mar 31, 2012, and initially convert the loans into bonds backed by state government guarantee.

After that, The states would take over the liability from the distribution companies in the next two to five years by issuing special securities and repayment.The balance 50% would be restructured by rescheduling loans and providing moratorium on the principal.

As a result of these exercise, State owned companies engaged in power generation will get their dues (from State Electricity Boards (SEBs) post the restructuring).

But good news stops there, There are other areas such as Fuel linkages, Land acquisition which needs to be tackled, to see overall improvement. Due to these bottlenecks companies are refrained to under take new projects and collectively it result in hardship to achieve financial closure.

Coal deficit will continue to remain a key issue for generating companies. Any reform measures announced by the government that tackle land and environment clearance issues, increase domestic coal production and/or improve the economic viability of PPAs (power purchase agreements) may result in upward re-rating of sector, according to Morgan Stanley, a leading Foreign brokerage firm commented.

According to Motilal Oswal Securities – Debt recast plan was a step in the right direction, it is unlikely to give a boost to power generation companies. He believes the success of the debt- restructuring plan would rest largely on acceptance by four states–Tamil Nadu, Rajasthan, Haryana, and Uttar Pradesh–which account for roughly 70% of the accumulated losses of the state electricity boards.

Another change that will follow is that as of now demand for merchant power has been low as rates in spot markets are higher, but as the health of distribution companies improves, they would be able to afford merchant power and buy more from power companies.






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