ICRA Nepal assigns ICRA grade 4 to proposed 2.64 crore units shares of Upper Tamakoshi Hydropower indicating below average fundamentals

ICRA Nepal has assigned an “[ICRANP] IPO Grade 4”, indicating below-average fundamentals to the proposed Initial Public Offering (IPO) of Upper Tamakoshi Hydropower Limited (UTHL). ICRA Nepal assigns IPO grading on a scale of IPO Grade 1 through IPO Grade 5, with Grade 1 indicating strong fundamentals and Grade 5 indicating poor fundamentals. For the grading categories 2, 3 and 4, the sign of + (plus) appended to the grading symbols indicate their relative better position within the grading categories concerned. UTHL is proposing to come out with an IPO of 2.64 crore units of equity shares of face value NPR 100/- each at par. Of the total shares, 1.05 crore unit shares will be issued to project affected areas while remaining 1.58 crore shares will be issued to general public. The assigned grading takes into account the relatively lower return potential of the 456 MW Upper Tamakoshi hydro-electric project (HEP) being developed by UTHL. Significant delay in project commissioning (mainly due to earthquake/blockades), high cost of borrowing during construction and unhedged foreign currency contractual liabilities has resulted in high cost escalations for the project. Low tariff rates coupled with escalated project cost (Rs 14.4 crore per MW including IDC1) constraints the return potential from the project. Additionally, the borrowing costs for the project remain on the higher side (currently 12% for majority of loans) which along with high debt component in funding mix (84% including IDC) also limits the quantum of returns to shareholders during the loan repayment period. Hence, any loss of generation due to shortage of water or silting can negatively impact the project earnings and return indicators. The grading is also constrained by interest rate volatility in the market and the counterparty credit risks arising out of exposure to loss making NEA (Nepal Electricity Authority) for the energy supplied, although the same is partly mitigated by the fact that NEA is fully owned by the Government and has been making payments to IPPs (Independent Power Producers) in a timely manner in the past. Nonetheless, the grading factors in the significant construction progress achieved in the project (92% complete as of mid-Oct-17) which reduces execution risks to a large extent. The grading also considers the strategic importance of the project to the country being the largest project in development so far and hence funding risks is considered to be minimal for the financing gap (Rs 5 arba) created by cost escalations. NEA, as the main promoter (55% holding presently), brings in significant experience in development and operations of HEPs; other promoters are also Government undertakings which provides additional comfort. With a firm PPA in place and positive demand outlook owing to supply-demand gap in the power sector, the tariff and off-take risks are minimal. Evacuation risks for the project are also low as the project would itself be constructing the required substation for evacuation. The project would also be entitled to capital subsidy of Rs 50 lakh per MW from Government upon connection to national grid. UTHL is developing a peaking run of the river (ROR) hydropower project with 4 hours peaking capacity in Tamakoshi river– 456 MW Upper Tamakoshi Hydroelectric Project (UTHEP) in Dolakha district of Central Development Region of Nepal. The generation license for the project was obtained from Ministry of Energy on December 2010, valid for 35 years including the period of construction on Build Own Operate Transfer (BOOT) basis. The project has faced substantial time overrun compared to Required Commercial Operation Date (RCOD) as per PPA (25th December 2015 for 4 units and 14th July 2016 for remaining 2 units (i.e. 304 MW and 152 MW respectively), on account of Apr-2015 earthquake and subsequent blockades. PPA for UTHEP was signed on December 2010 with NEA and the agreed tariff for wet season is Rs 3.63 per kWhr and for dry season is Rs 6.96 per kWhr (vs. tariff of Rs 4.8 and 8.4 respectively applicable to other current PPA) with 3% escalation on successive tariff for 9 years.