ICRA Nepal assigned LB+/A4 ratings to Rs 69.3 crore loan of Rapti Hydro & General Construction

Tue, Jun 30, 2020 3:47 PM on Credit Rating, Latest,

ICRA Nepal has assigned a long-term  rating  of  [ICRANP] LB+ (pronounced  ICRA NP  L  B plus)  to Rapti  Hydro  &  General Construction Limited’s (RHGCL) long-term loan and a short-term rating of [ICRANP] A4 (pronounced ICRA NP A four) to its short-term loans.

The assigned ratings are constrained by the relatively higher project cost (NPR 220 million per MW) and the inherent project execution  risks(~60%  complete  as  of  mid-February  2020)associated  with  the 5-MW Rukum  Gad HPP amid  the delayed project execution scenario. This led to the failure to meet its required commercial operation date (RCOD)1. This exposes the company to various risks such as a late COD penalty, loss of tariff escalations and reduction in the project period in case of further delay. The ratings also factor in the high evacuation risk for the project with no evacuation structures in place so far.Any delays in project execution that can emanate from geological surprises, floods and landslides in the ~2,400-m long pipeline alignment could result in the failure to meet the revised RCOD and escalate the project cost,thus impacting RHGCL’s financial and debt coverage indicators amid the fixed tariff and fixed escalation regime.The ratings are also constrained by the bank funding risk that requires 70% funding of the escalated cost of NPR 140 million (budgeted cost revised to NPR 1,100 million from  NPR  960  million),which  is yet  to be  tied up. The  non-materialisation  of this  would require  additional equity infusion by the promoters to cover the same.Similarly, a rating concern emanates from hydrological risks, given the absence of  a  deemed  generation  clause  in  the  power  purchase  agreement  (PPA) for  which  no  compensation  is  payable  to  the company by the Nepal Electricity Authority (NEA) in case of an adverse flow in the river. The ratings are also constrained by the  counter party  credit  exposure of the NEA,  which  has  a  moderate  financial  profile(with  recent  improvements). This  is partly mitigated by the sovereign support of the Government of Nepal (GoN) to the NEA and its past track record of timely payments to independent power producers (IPPs).

Credit strengths

  • Institutional  promoters  and prior experience of board  and  management team in hydropower  sector
  • Low tariff risk,given long-term PPA at predetermined tariffs and escalations

Credit challenges

  • Inherent risk of project execution
  • Funding  risk,given  the revised  projected cost
  • High evacuation risk,given non-completion of NEA’s evacuation structures and transmission lines connecting them
  • Stretched coverage ratios and financial  indicators amid delayed project commissioning and relatively higher estimated project cost
  • Low offtake risk;however, provision of 10% reserve margin clause in PPA
  • High hydrology risk,given lack of deemed generation clause in PPA

About the company 

Rapti  Hydro  &  General  Construction Limited  (RHGCL),  incorporated  on October21,  2008as  a  public  limited  company,  is developing the 5-MW Rukum Gad HPP in the Rukum district, Province 5 of Nepal at a budgeted cost of NPR 1,100 million at a D:E ratio of 70:30. So far, the equity requirement has been injected. However,the required debt component is yet to be tied up for the increased project cost.The company’s paid-up capital,including advances,as of mid-January 2020 was ~NPR 319 million,which  is  100%  promoter  held.  The  major  promoters of  the  company include  M/s CEBD  Hydropower Development Company Limited with ~96.5% equity through its subsidiary and associates viz. M/s Universal Power Company Limited(~45%)and M/s Radhi Bidyut Company Limited(~40%).The project is a low head and high discharge run-of-the-river (R-o-R) type and is being developed at a 40% probability of exceedance (Q40). The plant load factor (PLF) of the project is 65% with an annual production capacity of~28.5 GWh of energy. The dry energy mix of the project on the overall energy is ~18%. 

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