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IEEFA Australia: Adani’s ‘Pit-to-Plug Strategy’ Is Fraying at Both Ends

June 12, 2017
Tim Buckley

Gautam Adani, the chairman of the Indian conglomerate Adani Group, has long argued that the Carmichael coal proposal in the Galilee Basin of Australia is a key part of his company’s “integrated pit-to-plug strategy.”

The Adani logic for the Carmichael project assumes that the traded price of seaborne thermal coal is irrelevant to the commercial viability of Carmichael because the coal would be used within the Adani family group of companies. The company line is that Carmichael venture needs to be viewed, in other words, strictly in the context of the overall profitability of the pit-to-plug  strategy.

IEEFA sees Carmichael as both unviable and unbankable if it is tied to actual coal markets (with the forward price of thermal coal back down to US$66/t), which is why the pit-to-plug strategy Adani talks up is the linchpin said to be holding the proposal together.

It’s a shaky foundation on which to proceed, however. Last week Adani Power reported that its core asset —the 4.6 GW 100 percent import-coal-fired power plant at Mundra—is no longer viable, news that brings what was an already questionable argument for Carmichael into further question.

In IEEFA’s view, any decision to walk away from Carmichael would require a A$1.4 billion (US$1.05billion) write-off for Adani Enterprises (AEL), a very unpalatable outcome for Adani Group bankers owed a collective US$15 billion, particularly if Adani Power (APL) were forced to also take a US$1 billion write-down on Mundra on top of the US$954 million net loss just reported.

  • Adani Power’s financial distress is growing, which is why it has just recorded that US $954 million loss, a result of the Supreme Court of India ruling that the Mundra plant’s contractual obligations to supply electricity are valid, notwithstanding the entirely predictable rising cost of imported coal. APL’s 2016/17 result briefing included the statement that APL would undertake negotiations with the government over allocation linkages that “will allow us (APL Mundra) to access domestic coal.” Also telling is that APL’s average tariff realization was Rs3.85/kWh, well above the cost of new solar, which is down 30 percent year on year to a recent record low of Rs2.44/kWh. The company’s huge financial leverage only adds to significant tariff pressures.
  • The company’s financial leverage is unsustainable, a point on which the chart below does the talking on how Adani Power’s US$7.6 billion net debt is 16 times equity.

    Source: APL 2017 Annual Results, IEEFA Calculations

  • The Indian national strategic need for Carmichael has disappeared, as evinced by Energy Minister Piyush Goyal repeatedly reiterating policy that would have India cease thermal coal imports this decade. NTPC Ltd., the country’s largest thermal power producer, has reduced its coal imports radically, from 16Mtpa in FY2015 to 1Mtpa in FY2017. Under Goyal’s direction, Public Sector Undertakings or PSUs will cut imports to zero in FY2018. More broadly, Indian coal imports peaked at 212Mt in FY2015 and have declined steadily, with May 2017 imports  down 6 percent year on year to 18.15Mt.
  • The coal-fired power sector pressure across India is under extreme pressure, given the government’s policy drive to diversify the electricity grid into less emissions-intensive generation combined with the rapid renewable energy deflation. Something on the order of $15 billion in coal-fired power plant assets are for sale with no buyers, and the thermal power sector has become a major obstacle to sustainable growth in India. This problem is clearly evident in the 95 percent year-on-year decline in State Bank of India 2016/17 consolidated results, driven by a tripling of bad debt provisions and, incidentally, further undermining the Adani Group’s ability to get State Bank of India to make good on a $1 billion Adani Australia loan commitment.
  • “Defer, delay and pray,” appear to be the unspoken Adani watchwords now as the company keeps pushing out the Carmichael timetable, offering one excuse after another on why it hasn’t happened yet. ‘First coal’ was due originally by 2014/5, now the company says 2021. It was only this past December that Adani said a “Financial Investment Decision” would come out in March but then, two months later, Adani announced it would delay that decision because the Queensland Government was refusing to grant a five-year royalty holiday, a taxpayer subsidy estimated to be worth $A370 million. And while as of this month Adani Enterprises has “green lighted” its “Financial Investment Decision,” the fine print says it depends on “certain internal budget approvals for pre-construction activities.” Getting an $A1 billion Northern Australia Infrastructure Facility subsidy is required now to reach financial close by March 2018, and that decision won’t come until the end of 2017, probably arising due to the reputational risk issues that have emerged. As recently as May 2017 Adani had talked about financing being in place by June 2017.  In fact, financial close will be very difficult to secure given the leverage-on-leverage nature of the Adani Family group, with margin loans on the promoter’s shareholdings in each of the group’s four listed entities, which in turn all have significant financial leverage. The off-balance sheet Adani Abbot Point Coal Terminal that would support the Carmichael project has extensive borrowings too. Other hurdles to financial close include outstanding coal import invoice fraud allegations and the billions of dollars in write-downs concurrently at Adani Enterprises and Adani Power will be problematic for Adani bankers.

As Adani continues to find multiple reasons to delay progress on Carmichael, one might argue that perhaps it is looking to holdbacks on a hoped-for string of royalty/loan/water subsidies as the excuse it needs to withdraw from the project.

Tim Buckley is IEEFA director of energy finance studies, Australasia.


IEEFA Asia: More Evidence of Stark Change in Seaborne Thermal Coal Markets

IEEFA Australia: Adani Can’t Seem to Get the Public Subsidies It Requires for Its Carmichael Coal Project

IEEFA Asia: India’s Electricity-Sector Transformation Is Happening Now


Tim Buckley

Former Director Energy Finance Studies, Australasia, Tim Buckley has 25 years of financial markets experience, specializing in equity valuation, including as a top-rated analyst and as co-founder and managing director of Arkx Investment Management.

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