ICRA Nepal assigned LBB- ratings to Rs 1.22 billion long term loan of Mid Solu Hydropower Company

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).

Credit strengths

• 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

Credit challenges

• 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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