The 11th AGM of Molung Hydropower Company Limited held on 6th Falgun, 2077 discussed issuing an IPO. ICRA Nepal has now assigned an issuer rating of [ICRANP-IR] BB (pronounced ICRA NP issuer rating double B) to Molung Hydropower Company Limited.
ICRA Nepal has also assigned a long-term rating of [ICRANP] LBB and a short-term rating of [ICRANP] A4+ to the bank limits of MHCL.
Molung Hydropower Company Limited, incorporated on November 28, 2019, as a public limited company, was established with the objectives of investment and development of hydropower project.
The company is operating a 7MW Molung Khola HPP in Okhaldhunga district, Province 1 of Nepal. The project is a run of the river (R-o-R) type and has been developed at a 40% probability of exceedance (Q40). The project commissioned from March 26, 2018, i.e., a month prior to its Required COD of April 2018. Similarly, the project was developed at the total project cost of ~ NPR 207 million at an approximate debt-equity (D: E) of 69:31.
The paid-up capital of the company as of mid-Jan 2021 is NPR 435.5 million, which is 100% promoter held since the company is yet to issue an IPO to the general public.
As of date, the major promoters ARE Ms. Anak Hydropower Co. P. Ltd. (~54%), Ms. Suryamaya Maharjan (~20%), Mr. Kabin Maharjan (~17%), Mr. Nabin Maharjan (~8%), and other three shareholders, aggregately holding nominal shares worth ~1% of the total paid-up capital.
The hydropower company has an operational 7-MW project. The ratings also factor in the low tariff and offtake risks, given the already signed long-term power purchase agreement (PPA) with the Nepal Electricity Authority (NEA, the sole purchaser and distributor of electricity in Nepal) at pre-determined tariff rates and escalations.
Additionally, the company has negotiated a stretched repayment tenure for its bank loans with lender banks (from 15 years to 17 years). Once the proposed IPO raises the capital, the company’s debt burden will further be reduced.
According to the rating agency, the rating action also factors in the promoter support to the company as evidenced from the funds provided by MHCL’s promoters during the period of stretched liquidity. ICRA Nepal also considers the positive demand outlook for the energy sector owing to the supply-demand gap as well as the increasing energy consumption in the nation.
Nonetheless, the ratings remain constrained by the project’s moderate evacuation risks. The 33KV transmission line that evacuates the energy from MHCL’s powerhouse to NEA is currently being shared with another project in the region, pending the completion of NEA’s 132 KV transmission line in the region. This sharing of the transmission line has required MCHL’s project to operate in reduced capacity to avoid outages and tripping losses. This has in turn resulted in moderate operational performance—the project generated only ~71% of the contracted energy for the year ending FY2020.
Furthermore, ICRA Nepal notes the delays in principal repayment during the quarter ending January 2021, which was condoned by the banks as the banks and the developer were in the restructuring talks before the delay. The ratings are also impacted by the absence of a deemed generation clause in the PPA, which exposes the project to high hydrological risks, without receiving any compensation from NEA in case of any adverse flow in the river. The ratings are also constrained by the short supply penalty and/or loss of revenue that the company might face for the differences between the availability declaration (AD) and the actual energy supplied, as indicated in the PPA.
The ratings are also constrained by the counterparty credit exposure of NEA, which has a moderate financial profile. However, this is mitigated by the recent improvement in NEA’s financial indicators, its track record of timely payment to power producers, as well as the sovereign support of the Government of Nepal to NEA.
Key Financial Indicators
Going forward, the rating agency has stated that the completion of the 132 kV transmission line by NEA and the release of the 33KV line for use by MHCL will have a bearing on its future generation capacity and therefore revenue prospects. Moreover, timely issue and subscription of IPO, project’s hydrology, and interest rate volatility will also remain key drivers for determining the project's return metrics and debt coverage indicators. Any delays in bank loan repayments in the future will also remain a key rating sensitivity.