RAM upgrades Vidullanka's long-term rating

Ratings Lanka has upgraded Vidullanka PLC’s (“Vidullanka” or “the Company”) longterm corporate credit ratings to A- while its short-term rating has been reaffirmed at P2.

The outlook on the long-term rating remains stable. Vidullanka operates two mini-hydro power plants (“MHPPs”) with a combined capacity of 5.2MW, and has further invested in a joint venture MHPP with a capacity of 1.2MW.

The Company offloads the electricity generated to the Ceylon Electricity Board (“CEB” or “the Utility”), a state utility company which is the sole customer.

The upgrade reflects the Company’s improving financial profile and conservative funding strategy. Steady income and conservative strategy helped Vidullanka ease its debt levels, as the Company’s gearing ratio ameliorated from 0.32 times in FYE 31 March 2009 (“FY Mar 2009”) to 0.24 times in FY Mar 2010 (end-September 2010: 0.17 times).

Over the short-term, the Company’s debt levels are expected to recede further as longterm borrowings pared down using proceeds from a rights issue completed in November 2010. Going forward, we envisage the Company’s gearing levels to remain below 0.45 times, even after factoring additional borrowings for new projects.

The upgrade also takes into consideration the Company’s efforts to mitigate its dependence on its two main power plants. With regard to the new projects, the Company would only fund up to 60% of project cost with borrowings; the management’s conservative financial policy is viewed positively.

Meanwhile, the Company’s ratings are support by its sturdy financial profile, established track record, and favourable contract terms. Vidullanka’s operating profit before interest and tax (“OPBIT”) margins improved over the period to 52.22% by FY Mar 2010 (FY Mar 2009: 49.47%) and further to 69.39% by end-September 2010.

The wider margins were supported by greater power generation. This translated to better return on capital, which augmented to 30.33% and 21.04% over the same period (FY Mar 2009: 15.70%). With the Company also retiring debts using internally-generated capital, its fund from operations (“FFO”) debt coverage ratio has strengthened from 0.73 times to 1.29 times.

Moreover, with easing debt levels, the Company’s gearing ameliorated to 0.17 times by end-September 2010 from 0.32 times as at end-FY Mar 2010. Vidullanka is an experienced player in the renewable energy sector, having built and commissioned four MHPPs.

Moreover, none of the power plants have to-date not suffered any major internal outages. In addition, the Company’s subsidiary, Vidul Construction Limited (“VCL”) successfully completed the joint venture project on time. VCL is specialised in feasibility studies, designing, building, operating and maintaining power plants.

Under power purchase agreements (“PPA”) signed with the CEB, which is the Company’s sole customer, the national utility company is obliged to purchase all electricity generated by the MHPPs over the tenure of the contracts; these PPAs have tenures of 15 years.

The CEB has recently become profitable and we envisage that state support would be forthcoming given its systemic importance. Moreover, CEB has been maintaining a good payment track record with the Company.

On the other hand, the ratings are constrained by Vidullanka’s dependence on weather patterns for revenue generation and renewal risks associated with its PPAs. Although all electricity generated by Vidullanka is offloaded to CEB, the Company’s revenue is dependent on rainfall in the region. Moreover, Vidullanka’s plants are of the run-of-river variety that operates without a dam. Hence, there is also some element of seasonality in its monthly revenues.

The Company also faces renewal risks, with its first PPA expiring in 2016. Nonetheless, we note the efforts taken by the management to diversify revenues sources through investments in other power projects; the first joint venture which is already contributing dividend income. The construction on the second joint venture project is already under way, and the MHPP is expected to be commissioned by May 2011.

 To further diversify its income sources the Company has diversified into provision of consultancy on mini hydro projects through VCL; this includes feasibility, design, construction, commissioning and maintaining of power projects.

Moreover VCL is venturing into product development; as a first step company has now started manufacturing control panel required for the power projects.

Going forward, we anticipate electricity demand to augment at a faster pace, in line with the Government’s vision to provide electricity for all households (only 80% of the population has access to electricity at present) at the end of the 3-decade civil war.

Over the recent past, demand for electricity has been growing steadily at 6 – 7% per annum. Furthermore, the Government aims to increase contribution from the renewable sector to 15-17% of total power generation by 2015 from 5.5% at present.

In this regard, the Company remains focused on the renewable energy sector.