The Ujwal DISCOM Assurance. Has UDAY Worked? POWER SECTOR

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1 INDIA RATINGS & RESEARCH Has UDAY Worked? Disparity and delay in payment of dues by state utilities, largely a manifestation of discoms' liquidity strain, plagues and often constrains the financial health of counter parties and ultimately ends up disincentivising investors. UDAY has relieved some discoms from the pressure of mounting outstanding dues. Of the 40 discoms for which information is available, 5 have brought down their payables for power purchased to less than 90 days as on 3 March 07 and 9 discoms have receivable of less than 90 days. The Ujwal DISCOM Assurance Yojana (UDAY), launched in vember 05 by the Ministry of Power (MoP), is the third financial relief package for state power discoms in years, starting with power bonds issued to central power utilities in September 0 0 3, f o l l o w e d b y F i n a n c i a l Restructuring Plan (FRP) announced in September 0. The FRP scheme was designed to improve the financial health of the discoms. Presently, UDAY also sets out certain milestones relating to operational performance including reduction of AT&C losses and gap between ACS and ARR in a time bound manner. As of FYE7, states and one union territory (Puducherry) have joined UDAY. During JanuaryMarch 07, nine states joined UDAY, thus the impact on operational improvement is likely to be muted. Three states have not joined the UDAY scheme. Of the states that joined UDAY, eight states and the union territory of Puducherry joined the scheme only for operational improvement and do not intend to issue any bonds. The UDAY scheme envisaged the following: Financial turnaround Operational improvement Reduction of cost of generation of power Development of renewable energy Energy efficiency and conservation State support to power utilities mainly consists of subsidies, subventions, contribution to equity, direct loans and guaranteeing loans raised by state power utilities. State support through capital outlays, loans and advances and current expenditure during FY0FY7 (budget estimate, BE), increased at a CAGR of 4.4%. On an average, state support to power sector during FY0FY7 (BE) was.9% of GDP. Following the launch of UDAY, state government's support to power sector has increased further. UDAY Bonds Raised till FYE7 As on 30 September 05, total outstanding liabilities of discoms were around INR4.3 trillion. Excluding debt relating to restructured accelerated power development and reforms programme,restructured Accelerated Power Development and Reforms Programme, (RAPDRP) and FRP (0 package), total debt stood at INR3.9 trillion. Under UDAY, the state governments were to convert 75% of the amount into state bonds and the remaining 5% were to be converted by the discoms as state guaranteed bonds or have it repriced by the banks/financial institutions. As of FYE7, states and one union territory (Puducherry) joined UDAY. Their aggregate debt of INR3. trillion accounted 97% of the total discom debt. However, of INR3. trillion, only INR.9 trillion qualified for restructuring as the balance debt was restructured under RAPDRP and FRP. Till FYE7, the total bonds issued by the state governments and discoms stood at INR.33 trillion. Of this, INR.09 trillion was issued by 5 states and INR3. billion was issued by discoms of, and, implying.50% of the discoms debt of 5 states qualifying under UDAY has 0 energetica INDIA SEPTEMBER 7

2 already been issued. So far six states namely,,,, and Uttar Pradesh have issued bonds for the entire amount qualifying under UDAY. By FYE7, the bond issuance amount of the nine states pending under UDAY was INR3.7 billion. (See Figure ). These bonds will either be issued by discoms or by state depending on fiscal space available to each state as per their respective Fiscal Responsibility and Budget Management Act. Of the states that signed UDAY but not issued bonds are Arunachal Pradesh Kerala Mizoram Puducherry Figure : Statewise Bond Issuances Meghalaya Tamil Nadu Figure : Power Sector Performance of t Joined UDAY Nagaland Odisha West Bengal AT&C loss (FY5, %) Net liability as on 30Sep te: liabilities are net of RAPDRP, FRP, State Government loans, etc. ACS ARR Gap (FY5, INR/unit) , Bond issuances until 3Mar debt ,0.4 bond issuances by s debt from financial institutions Sikkim Tripura and Uttarakhand These states joined UDAY for operational improvement. The remaining two states are and. While the debt of Power Distribution Company Ltd as on 30 September 05 stood at INR5.0 billion (entire debt was from Government of ), debt of discoms stood at INR9.3 billion (INR0. billion from Government of and INR97.7 billion from financial institutions). Even in case of Puducherry, the power department had debt of INR0.04 billion as on 30 September 05, but since the power department is an arm of the state government, this debt was already part of state government's debt. Nagaland, Odisha and West Bengal have not joined UDAY. In case of bond issuances debt from state government ,35.00 bonds to be issued 4.5 debt from other sources Nagaland, power is handled by the power d e p a r t m e n t a n d therefore its debt is already part of the state government's d e b t. A t F Y E 5, Nagaland had debt of INR3. billion from financial institutions. Odisha and West Bengal each have t h r e e d i s c o m s. However, two discoms of West Bengal are private companies. Combined debt of d i s c o m s / p o w e r department of the aforesaid states from financial institutions was INR.0 billion. (Refer Figure ) F i n a n c i a l a n d Operational P e r f o r m a n c e o f s after UDAY A comparison between target and actual achievement of financial and operational performance of discoms under UDAY suggests varying degree of success by different discoms with reference to the targets. The scheme envisaged an improvement in financial and operational performance through efficiency gain (reduction in AT&C losses) and monitoring (setting up of monitoring framework and action plan). Although 7 states joined UDAY in FY7, these states do not have an action plan yet (as at FYE7); five states were yet to appoint a nodal officer and 4 states yet to constitute a state level monitoring committee. (Figure 3) O p e r a t i o n a l a n d f i n a n c i a l performance improvement under the UDAY scheme in FY7 is similar to the improvement after FRP. Aggregate AT&C loss reduction in FY7 (4.4pp over FY5) was higher than FY4 (4.0pp, over FY). Financial improvement (ACS ARR gap reduction) in FY7 (INR0.5/unit over FY5) was lower than FY4 (INR0./unit over FY). The impact of UDAY on financial and operational improvement is on the right track, however, with large interstate variations. Only three states, and achieved their AT&C loss reduction target in the 9MFY7. Of the 0 states, which joined UDAY in FY, AT&C loss reduction trajectory of six states,, Jammu and Kashmir,, and Uttarakhanddo not inspire confidence. Only and have been able to achieve AT&C loss reduction trajectory in 9MFY7. In fact, the AT&C loss of six states was higher in 9MFY7 than FY: and Uttarakhand and although reduced AT&C losses in 9MFY7, it still was higher than the ninemonth target. energetica INDIA SEPTEMBER 7

3 Figure 3: Status of UDAY Monitoring Framework Arunachal Pradesh Kerala Meghalaya Mizoram Puducherry Sikkim Tamil Nadu Tripura Figure 4: Statewise Performance of AT&C Loss Reduction (%) Puducherry Uttarakhand Action plan Fy dal officer te:,,,, Jammu and Kashmir,,,, Uttar Pradesh and Uttarakhand have completed the requisite process. Fy7 (9 months target) 9. te: and Puducherry information is for six months FY5 for Puducherry instead of Fy Performance with respect to ACS ARR gap reduction is also no better. Of the ten states that joined UDAY in FY, only and were able to achieve ACS ARR gap reduction target in 9MFY7. While State level monitoring committee Achievement and were able to reduce it from FY level, in case of, Jammu and Kashmir, and it increased from FY level. Underachievement in ACS (average cost of supply) ARR (average revenue realisation) gap reduction by several states from the targeted level is a cause of concern and requires rethinking on strategy. Impact on s' Finances UDAY has impacted discoms' finances favourably, both on the cost and revenue front. Interest cost is more than % of discoms' cost; it is estimated that UDAY has resulted in INR9.9 billion savings in interest cost in 9MFY7. At the same time, savings in power purchase cost is estimated to be INR billion for,,, and. CSPDCL turned profitable in QFY7, increased profitability in 9MFY7, DHBVN turned profitable in QFY7 and UHBVN turned profitable in 3QFY7. While was profitable and had low losses, turned around of discoms (DHBVN and UHBVN) marks the success of UDAY. However, the success of UDAY will lie in how quickly discoms of, (maintains),,, Tamil Nadu, and Uttar Pradesh can be turned around and maintains improved financial strength. In its FY Infrastructure Outlook, IndRa analysed payment behaviour of discoms from selected states. Disparity and delay in payment of dues by state utilities, largely a manifestation of discoms' liquidity strain, plagues and often constrains the financial health of counter parties and ultimately ends up disincentivising investors. IndRa believes improved financial position of discoms would reduce receivable days of power producers supplying power to discoms. Reasons for Below Par Achievements One of the reasons for below par achievements in reduction of AT&C losses and ACS ARR gap is less than 50% achievement in six of the 0 crucial operational parameters. While performance of feeder metering both in rural and urban areas is close to 90% and more, the same for smart metering needs concentrated effort for improvement. IndRa believes improvements in underperforming parameters such as smart metering, distribution transformer (DT) metering (rural), DT metering (urban) and usage of LED bulbs is vital for achieving operational and the consequent financial success under UDAY. Tariff hikes alone will have a limited impact on the financials of discoms. On the contrary, a steep tariff hike often acts as an incentive for nonpayment. Of the 7 states and union territories that have joined UDAY, only two states (Kerala and ) have so far not filed their multiyear tariff (MYT)/aggregate revenue requirement for FY. While tariff orders have been issued by the regulators for 5 states, it is yet to be issued for states. Arunachal Pradesh did not propose any tariff hike for FY. Average tariff hike in,, Figure 5: Statewise Performance of ACS ARR Gap Reduction (INR/unit) Puducherry Uttarakhand Fy Fy7 (9 months target) te: Himachal and Puducherry information is for six months Achievement energetica INDIA SEPTEMBER 7

4 Figure : s' and ' UDAY Performance Ranking Ranking State BESCOM HESCOM MGVCL MSEDCL PGVCL DGVCL MESCOM CESC UGVCL MPPKVVCL AVVNL GESCOM PUVVNL TSSPDCL KESCO TSNPDCL DHBVNL APEPDCL HPSEB JVVNL ED APDCL CSPDCL MPPoKVVCL UHBVNL APSPDCL MPMKVVCL NBPDCL Puducherry ED Puducherry PSVVNL UPCL PSPCL MVVNL JdVVNL MSPDCL SBPDCL KSEBL J&K PDD DVVNL JBVNL TANGEDCO Uttarakhand Kerala Tamil Nadu State Ranking and Uttarakhand is higher than the tariff hike proposed in their respective UDAY MoUs. B i h a r e l e c t r i c i t y r e g u l a t o r y commission has approved a tariff hike of about 55% for FY as against 4% tariff hike proposed by two discoms in their aggregate revenue requirement filing to the regulator. However, average tariff hike will be % if the state government extends subsidy support to below poverty line families and rural consumers as proposed in UDAY MoU. State and Performance Based on the achievements of states and discoms on various parameters versus commitments made in UDAY MoUs, states and discoms are ranked (subject to data availability) on their quarterly performance. As on 3 March 07,,,, and secured the top five positions (Figure ). The bottom five positions were occupied by Kerala,, and (joint 9th rank), and Tamil Nadu. Individual discom ranking has a significant impact on the overall ranking of the state. For instance, UHBVNL ranked 4th as against 7th rank of DHBVNL pulled down states ranking to sixth position. Similarly, JdVVNL which is ranked 34th pulled down state's ranking to 0th position. The taking over of discom's debt by the state government in their own books and converting them as equity, loan or grants to discoms has indeed benefited the discoms immensely. However, it has yet not shown any tangible improvement in financial operations of discoms. Of 40 discoms, for which information relating to their outstanding dues is available (as on 3 March 07), 5 have payable outstanding of more than 90 days for power purchased. Only 5 discoms have succeeded in doing so. However, receivable position of discoms has shown improvement, 9 discoms have receivable (outstanding dues as a percentage of yearly turnovers) of less than 90 days. IndRa believes, longlasting impact of UDAY on financial performance of state power distribution sector is contingent on the performance improvement of MPMKVVCL, NBPDCL, Puducherry ED, PSVVNL, UPCL, PSPCL, MVVNL, JdVVNL, MSPDCL, SBPDCL, KSEBL, J&K PDD, DVVNL, JBVNL and TANGEDCO. Impact of UDAY on Financial Sector Restructured debt of discoms was mainly from banks. After issuance of UDAY bonds, these bonds moved to banks' treasury portfolio from lending portfolio. Benefit to banking sector from UDAY is in the form of freeing up of capital. IndRa believes an estimated INR0 billion is potentially freed up, thus equipping banks to bolster their balance sheets. On the profit and loss side, banks 4 energetica INDIA SEPTEMBER 7

5 have had both positive (improved asset quality) and negative (interest income loss) impact on their balance sheets. Apart from improved asset quality, the banking sector will also gain from the improved cash flow of independent p o w e r p r o d u c e r s a n d l o w e r delinquencies from them. According to IndRa's calculation, the average coupon on UDAY bonds is.% as against the interest rate of %4% charged by banks, resulting in interest income loss. However, if the banks hold the UDAY bonds in HeldforTrading or AvailableforSale categories, they may benefit from the marktomarket gains. Based on April 07 secondary market trading of UDAY bonds, IndRa's estimate suggests 35bp marktomarket gain on these bonds. Therefore, while on the lending side banks are experiencing interest income loss, treasury income gains may offset some of their interest income loss. SPEAKING TO... Energetica India speaks to Mr. Siva Subramanian, Associate Director Infrastructure Ratings and Ms. Devika Malik, Analyst, Public Finance, India Ratings & Research to learn more about UDAY's onground performance. ENERGETICA INDIA: What actions are yet needed to make UDAY a success? SIVA SUBRAMANIAN & DEVIKA MALIK : With aggregate technical and commercial losses (AT&C) dropping 44bps to reach at 0.% in FY7 (source: UDAY Dashboard, Ministry of Power, accessed on June 07) and the gap between average cost of supply and average revenue realisation (the gap) narrowing by 5paisa/unit to 45paisa/unit in FY7 (source: UDAY Dashboard, Ministry of Power, accessed on June 07), the performance of s has clearly improved in FY7 over FY5. These two parameters are reflective of both operational and financial performance. AT&C loss is a direct function of billing and collection efficiency and the gap is dependent on interest cost, power purchase cost, adequate tariff hikes along with collection efficiency and technical loss reductions. So, the improvement of performance is not only restricted to the operational front but its impact can also be seen on the finances of various s. Having said that, there is still a long road to travel before achieving the desired sustainable turnaround in the s' performance and become operationally profitable in specific and the power space at large. First and foremost the states immediately need to chalk down their action plan. The 7 states, that joined UDAY in FY7, did not have an action plan at FYE7. Further five states had not appointed a nodal officer and 4 states had not constituted a state level monitoring committee till FYE7. So appropriate plan and a strict framework for its monitoring is core to derive the desired results from the scheme. Secondly, the states need to create right infrastructure and put in place appropriate technologies within timelines specified in each's MoUs, which generally ranges between three to four years. Currently there is less than 50% achievement in six of the 0 crucial parameters. Metering feeder metering, distribution transformer metering and smart metering both in urban and rural at various levels of the distribution network is of prime importance. While performance of feeder metering both in rural and urban areas is close to 90% and more, the same for smart metering needs concentrated effort. Another important area where efforts need to be directed is to promote the usage of LED bulbs and replace existing incandescent bulbs with LED bulbs which will result in reducing energetica INDIA SEPTEMBER 7 5

6 power consumption and peak load. ENERGETICA INDIA: How has UDAY impacted the financial rating of discoms? SIVA SUBRAMANIAN & DEVIKA MALIK: UDAY has impacted discoms' finances favourably, both on the cost and revenue front. State Power Distribution Company Limited CSPDCL turned profitable in QFY7, 's discoms increased profitability in 9MFY7, Dakshin Bijli Vitran N i g a m L i m i t e d D H B V N t u r n e d profitable in QFY7 and UHBVN turned profitable in 3QFY7. An INR9.9 billion savings of interest cost, which is more than % of discoms' cost, has been estimated to have resulted under UDAY in 9MFY7. At the same time, savings in power purchase cost is estimated to be INR billion for,,, and. Disparity and delay in payment of dues by state utilities, largely a manifestation of discoms' liquidity strain, plagues and often constrains the financial health of counterparties and ultimately ends up disincentivising investors. UDAY has also relieved some discoms from the pressure of mounting outstanding dues. Of the 40 discoms for which information is available, 5 have brought down their payables for power purchased to less than 90 days as on 3 March 07 and 9 discoms have receivable of less than 90 days. However, financial performance of the discoms of,, Puducherry,, Uttrakhand,,,, Kerala,, and Tamil Nadu needs to be turned around and maintained for longlasting success of UDAY. Financial improvement visible in FY7 was mainly due to reduced interest and power purchase cost. However, longlasting impact on financial performance will come from operational improvement, hence concentrated efforts are required to address AT&C loss reduction strategy. energetica INDIA SEPTEMBER 7