ICRA Nepal assigns Grade 5 rating to the upcoming IPO of Union Hydropower indicating poor fundamentals

ICRA Nepal has assigned Grade 5 rating to the upcoming IPO issuance of Union Hydropower Limited. The Grade 5 rating indicates poor fundamentals. The hydropower company will be issuing 7,50,000 unit shares will be issued to the locals of the project affected area while 29,12,500 unit shares to the general public at par value of Rs 100.

The assigned grading takes into account weak project profile of the operational 3 MW hydel developed by UHL led by high project cost (~NPR 265 million per MW), and low leverage in the funding mix (Debt: Equity mix of ~50:50 as of now) which constrain the project’s return potential. Return indicators will also be impacted on account of lesser number of tariff rate escalations and penalties led by substantially delayed commissioning of the project.

The revenue would remain volatile on account of inherent fluctuations in hydrology while lower tariff escalations can additionally reduce the return for investors. Going forward, ability of the company to achieve required operating parameters, efficacy of evacuation infrastructures and availability of sufficient hydrology will be the key parameters which can impact returns of the project.

UHL plans to have ~10% stake in each of the other two project SPVs but this may change at a later date. Preliminary feasibility studies for these projects have been completed which shows that capacity of Hongu Khola HEP and Mewa Khola HEP can be enhanced to 29.62 MW and 23.23 MW respectively. Given the nascent stage of the proposed projects, detailed project feasibility, cost estimates, funding mix and sources, tariff rates etc are not available.

The Power Purchase Agreement (PPA) was signed with NEA on February 10, 2013, valid for 30 years from commercial operation date or till validity of generation license whichever is earlier.

The shares of the company are proposed to be listed in the stock exchange post proposed IPO. As a part of IPO process, UHL would issue allocated portion to local inhabitants of project affected areas after which remaining amount shall be offered to general public and staffs of UHL.