ICRA Nepal has assigned a long-term rating of [ICRANP] LBB- (pronounced ICRA NP L Double B Minus) to Mid Solu Hydropower Company Private Limited’s (MSHCPL) long-term loan.
The assigned rating is constrained by the inherent project execution risks associated with the 9.5-MW Mid Solu Khola HPP amid its nascent project development stage (~7% financial progress,a pending generation licence and major work contracts across the civil, hydro mechanical, electro mechanical and transmission lines yet to be awarded). Given the stage of construction and the ongoing Covid-19 pandemic lockdown,the company may not be able to meet its current required commercial operation date (RCOD) of August 30, 2022 which is likely to result in a late COD penalty and/or loss of tariff escalations. However, the extent of such an exposure would remain dependent on the possible extension of the RCOD by the Nepal Electricity Authority (NEA) to address the impacts of the Covid-19 lockdown across the hydropower sector.Further, the rating also remains constrained by the high funding risk with the yet-to-be-concluded consortium loan agreement for project financing and only ~24% of the equity component infused so far. The assigned rating also remains constrained by the monthly short supply penalty as well as the 30% dry energy short supply penalty as per the power purchase agreement (PPA), which can impact the revenue profile of the company in case of fluctuations in hydrology. Similarly, rating concern also arises from hydrological risks,given the absence of a deemed generation clause in the PPA. The NEA is not bound to pay any compensation to the company in case of a weak hydrology for the project. The rating is 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).
- Prior experiences of the board of directors and management team an advantage
- Low evacuation risks given NEA’s evacuation structures at final stage of construction
- Low tariff risk given long-term PPA at predetermined tariffs and escalations
- Low offtake risk,however, provision of 10% reserve margin clause in the PPA
- High inherent project execution risks
- High funding risk given 24% of equity infusion and incomplete debt component
- Higher penalty clauses in case the project is unable to deliver 30% dry energy and supply required monthly energy
- High hydrology risk,given lack of deemed generation clause in PPA
About the company
Mid Solu Hydropower Company Private Limited (MSHCPL), incorporated on April 19, 2017 as a private limited company,has a paid-up capital of ~NPR 129 million as of May 30, 2020, which is 100% promoter held. The company has been promoted by six individuals which include Mr. Rajendra Prasad Gautam ~(28%), Mr. Bheem Bahadur Pal (18%), Mr. Badri Prasad Gautam (17%) ,Mr. Ganesh Datta Joshi (17%), Mr. Ramesh Raj Gautam (14%) and Mr. Nishant Lunawat (Jain) (6%).The company is developing a 9.5-MW Mid Solu Khola HPP in Solukhumbu district, Province 1 of Nepal. It is a run of the river (R-o-R) project and is being developed at 41.2% probability of exceedance (Q41.2). The PPA for the project has been entered under a six month dry energy and a six month wet energy PPA model with a dry energy mix of ~33%and eight tariff escalations. The annual contracted energy to be generated by the project is ~57 GWh at a PLF of 69%. The budgeted cost of the project is ~NPR1,754 million,which has been planned to be funded in a D:E ratio of 70:30. Equity infused so far is ~24% of the overall requirement while a loan agreement for the loan financing portion of NPR 1,228.3 million is yet to be signed. Rastriya Banijya Bank (lead bank) and the Nepal Bank Limited (participating bank) are in discussion to finance the project at a 65:35 ratio.The power to be generated by the project has been planned to be evacuated to the proposed NEA’s Tingla Substation.
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