Mumbai, July 31: In an effort to separate power projects' credit-worthiness from the state electricity boards (SEBs), promoters have begun seeking independent ratings.

This marks a deviation from the practice, since ratings have all along been restricted to state power boards. Credit Rating Information Services of India (Crisil) has rated a power project, and is in the process of rating several others.

The move follows the difficulty faced by many independent power producers (IPPs) to tie up finance because of low credit rating assigned to SEBs. Lenders, especially the foreign ones, have raised questions about the ability of SEBs to pay for the power purchased from power producers.

As a first step, many power producers are structuring payment mechanisms which would distinguish the repayment ability of a specific project from the financial health of the SEB concerned. This is sought to be achieved via three mechanisms: specifically designed escrow accounts, line of credits and/or state government guarantees.

In the escrow mechanism, the receipts from a particular district or a specific user category, like the high-tension users, goes directly into the escrow account.

The revenue from the identified area is estimated beforehand, based on current and expected cash flows, and will be more than the actual payment to be made by the state power board to the IPP. An escrow will be either backed or substituted by letter of credit and/or state government guarentee. This is expected to delink IPPs' repayment capability to their lenders from the SEBs' capability to pay the power producers. Once this is achieved, the foreign lenders will be more comfortable to fund power projects, sources said. Crisil has identified eight individual rating criteria for the rating of power projects. The overall rating is based on the inter-relationship of these parameters. The eight parameters are: power purchase agreements, financial structure and covenants, power costs, power purchasers credit strength, project completion risk, project operating risk, fuel risk and projected financial performance. The focus of Crisil's rating will be on conditions placed on the revenue stream.

The big power projects are expected to get rated first since they have a huge foreign debt component in their project outlay. It is the foreign lenders, much more than the domestic lenders, who are wary about SEBs, sources said.

Though many state governments have committed restructuring of their electricity boards, not much progress has been achieved since the issue is mired in a political tug-of-war. Neither the centre nor the states wants to take the initiative in resructuring SEBs. Crisil had rated around 10 SEBs on request from lenders and IPPs, while one of them - Kerala State Electricity Board - made its own request. The credit assessment leaves much to be desired since their financials are in a shambles, specially due to their low capitalisation and high indebtedness.

Crisil's 8-point rating formula

Power purchase agreements

Financial structure and covenants

Power costs

Power purchaser's credit strength

Project completion risk

Project operating risk

Fuel risk

Projected financial performance

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.