Upper Tamakoshi Hydropower Project and Its IPO; Fully Explained

Here is my speculation and the review of Upper Tamakoshi Hydro Electricity Project.

For latest assessment, please visit Upper Tamakoshi – a reality check for much hyped hydropower?

1) GENERAL BACKGROUND

Upper Tamakoshi Hydro Electricity Project (UTHEP) is the largest hydropower project being constructed in the country so far. It is located in Dolkha District, 197 km east of the capital Kathmandu.

The project is conceived as a peaking run-of-river project with an 822 gross head, a design discharge of 66 m3/s and an installed capacity of 456 MW.

The major components of this project are the intake, a 22 m high concrete dam, twin desanding basins, a 9.4 km headrace tunnel, an underground powerhouse with six Pelton turbines, a 2.9 km long tailrace tunnel, and a 47 km long 220 kV transmission line to Khimti substation. Additionally, around 4 km of adit tunnel has to be constructed.

The project has an authorized capital of NPR. 11 billion and the issued capital is NPR. 10.59 billion.

Authorized Capital	NPR. 11,000,000,000
Issued Capital	NPR. 10,590,000,000

It is developed by Nepal Electricity Authority (NEA). The actual shareholding of this project is as below.

	Shareholders	No. of Shares	%	Amount (NPR)
Promoter	Nepal Electricity Authority	43,419,000	41%	4,341,900,000
	Nepal Telecom	6,354,000	6%	635,400,000
	Rastriya Beema Sansthan	2,118,000	2%	211,800,000
	Citizen Investment Trust	2,118,000	2%	211,800,000
Ordinary	Local (Resident of Dolkha District)	10,590,000	10%	1,059,000,000
	Depositors of EPF	18,299,520	17.28%	1,829,952,000
	Employee of EPF, CIT, NTC, Rastriya Beema Sansthan	3,049,920	2.88%	304,992,000
	Employee of NEA and Upper Tamakoshi	4,066,560	3.84%	406,656,000
	General Public	15,885,000	15%	1,588,500,000
	Total	105,900,000	100%	10,590,000,000

Salient Features of the Project

Type of Hydropower	Peaking Run-of-River (PRoR)
Location	Lamabagar VDC, Dolkha District, Janakpur Zone, Nepal
Headworks Location	Lamabagar VDC
Powerhouse Location	Gongar Gaon, Lamabagar VDC
Catchment Area	1,745 sq. km.
Gross Head	822 m
Installed Capacity	456 MW
Annual Energy	2,381 GWh
Design Discharge	66.0 m3/sec
Headrace Tunnel	8.4 km
Penstock	1134 m
Tailrace Tunnel	2.9 km
Access Road from Charikot	68 km
No. of Units	6
Transmission line	220 kVA Double Circuit, 47 km (Gongar to Khimti Substation)
Construction Cost	NRs 35.29 excluding IDC

The total investment of this project is raised through a mixture equity and debt. The total equity investment will be NPR. 10.59 billion. NPR. 20 billion will be financed by EPF, CIT, RBS and NT. Besides these institutions, Government of Nepal has assured NPR. 11.08 billion as a gap funding during construction.

Debt

Lending Instiutions	Amount
Employee Provident Fund	10,000,000,000
Citizen Investment Trust	2,000,000,000
Rastriya Beema Sansthan	2,000,000,000
Nepal Telecom	6,000,000,000
Nepal Government	11,080,000,000
Total	31,080,000,000

The debt will carry 11 percent interest rate that can be revised mutually.

2) PROJECT STATUS

The project is located in Dolakha district. The basic infrastructures required for the project construction like land and road have been already purchased/constructed. The construction of civil works, headrace tunnel is in the full swing. 80 percent of the tunnel work has been completed till date. Import of machinery and installation is taking place. In overall figures, the project has completed 71 percentage so far. And in amount, the project has already spent NPR. 21 billion.

The project will come into operation phase wise. Out of six units, the first unit will start generation from Shrawan 2073 B.S. (July 2016). All the remaining units will start generation by Poush 2073 B.S. (December 2016)

MY OPINION:- The project will be able to achieve its target unless the project faces unexpected technical difficulties, particularly in tunnel. After all it has got support from every corner.  

3) PROJECT FEATURES

Technical Features

a) Project Cost:- The project will be the lowest cost project in Nepal. Thanks to its head which is above 800 meters. The cost per MW is NPR. 77.39 million without interest during construction (IDC). Even with IDC, the cost per MW is around NPR. 90 million which is considered as one of the cheapest project in Nepal. Currently, the cost per MW is around NRs. 160 to NPR 180 million.

MY OPINION:- Total cost of the project is at lower side which is always nice.

b)Electro-mechanical equipment:- The project will install electro-mechanical equipment supplied by Andritz Hydro GmbH, an Austrian company. Andritz has a high reputation of producing efficient equipments.

MY OPINION:- Efficiency of machinery is ensured. This will reduce the annual cost of repair and maintenance and will deliver the contract energy.

c) Energy:- The total yearly output is 2,381 GHw which will be sold to NEA. This makes Plant Load Factor (PLF) of 59.76 percent. In layman term “the higher the PLF, the better”. PLF represents the percentage of total sellable energy compared to its actual plant capacity. The industry standard is around 60 percent.

MY OPINION:- The PLF is 59.76 percent which is also the industry standard (59.76% is almost 60%).

d)Transmission Line:- The power will be evacuated through a 47 km long double circuit 220 kV transmission line at Khimti substation which will be connected to 75 km Khimti-Dhalkebar substation. Khimti-Dhalkebar 220 kV transmission line is funded by World Bank. Of the 188 towers, 180 have been already constructed.

MY OPINION:- Although there are some protest made by locals for the construction of new substation for power evacuation, it is safe to say that the completion of transmission line and substation will be on time since this project is highly prioritized by Nepal government.

Emotional Features

Upper Tamakoshi is a national level project which will be funded entirely through Nepalese people and Nepalese organizations. This is the biggest hydropower project in Nepal so far and the completion of national pride project is expected to reduce load-shedding significantly.

Financials

a) PPA Rates:- As per Power Purchase Agreement, the NEA will buy energy at a flat rate of NPR. 4.06 per kWh during the first year of operation. There is an escalation of 3 percent for the first 9 years. From 10^th year, NEA will buy energy at a flat rate of NPR. 5.30 per kWh which will remain constant throughout the entire license period.

MY OPINION:- By looking at the PPA rate, Upper Tamakoshi PPA rate is at lower side. Currently, NEA buys energy at NPR. 4.80 and NPR 8.40 per kWh during wet season and dry season respectively. This makes an average of about NPR. 5.10 per kWh in the first year of operation which will increase to NPR. 6.10 per kWh in the sixth year (it remains constant afterwards).

b) Revenue:- The first year revenue of the project from the sale of energy is estimated at NPR. 9.66 billion which increases to NPR 12.6 billion in 10^th year and remains constant throughout the license tenure.

MY OPINION:- NPR. 9.66 billion is the first year income which increases to NPR.12.6 billion over the years. The total equity investment is NPR. 10.59 billion. This is outstanding. However, this could have been even better if it had managed to get the standard PPA rate (NPR. 4.80 per kWh during wet season and NPR. 8.40 per kWh during dry season). The first year income could have been over NPR. 12 billion.

c) Indicators

Project IRR	25.2%
Equity IRR	59.0%
NPV at 11%	47,264,862,060
B/C Ratio (11%)	2.14

MY OPNION:- IRR industry average in Nepalese hydro is around 16 percent while equity IRR is in between 20 to 25 percent. The indicators of Upper Tamakoshi simply surpass these averages.

d) Projection

Profit and loss account  (in million)

Particulars/Year	1	2	3	4	5
Total Energy in GHh	2,381	2,381	2,381	2,381	2,381
Price per kWh	4.06	4.18	4.31	4.44	4.57
Income from Energy Sale	9,667	9,957	10,256	10,563	10,880
Government Subsidy	2,280
Less:
Operation and Maintenance Cost	104	106	108	110	112
Royalty	285	290	296	302	309
Interest on Debt	3,381	3,281	3,169	3,045	2,906
Depreciation	1,107	1,107	1,107	1,107	1,107
Total Expenses	4,876	4,783	4,680	4,564	4,433
Profit Before Bonus & Tax	7,071	5,173	5,576	5,999	6,447
Less:
Bonus & Welfare Fund	141	103	111	120	129
Profit Before Tax	6,930	5,070	5,464	5,879	6,318
Less:
Tax	-	-	-	-	-
Profit After Tax	6,930	5,070	5,464	5,879	6,318
Dividend to Shareholders	5,295	4,236	4,236	5,295	5,295
Reserve Transfer to BS	1,635	834	1,228	584	1,023
Total Reserve in BS	1,635	2,469	3,697	4,281	5,304
Number of Shares in million	106	106	106	106	106
EPS	65.44	47.87	51.60	55.52	59.66
DPS	50%	40%	40%	50%	50%

Cash flow  (in million)

Particulars/Year	1	2	3	4	5
Receipt
Opening Balance	-	7,172	7,090	8,349	9,899
Net Profit Before Tax	6,930	5,070	5,464	5,879	6,317
Add: Depreciation	1,107	1,107	1,107	1,107	1,107
Sale  of Fixed Assets	-	-	-	-	-
Total Receipt	8,036	13,349	13,660	15,335	17,323
Payments
Loan Re-payment	864	964	1,076	1,200	1,339
Tax	-	-	-	-	-
Dividend	-	5,295	4,236	4,236	5,295
E&M Replacement
Payment to Liabilities	-	-	-	-	-
Total Payment	864	6,259	5,312	5,436	6,634
Closing Balance	7,172	7,090	8,349	9,899	10,689

MY OPNION:- Above figures speak all. Cash dividend of 50 percent is possible in the first year of operation and I found positive cash flow even if the company decides to pay the dividend at my rates.

* The projection is based on the standard norms applicable for Nepalese hydropower. However, I have included NPR 5 million per MW as a subsidy amount that was announced by Government of Nepal.

4) FUTURE PROJECTS

The company has planned to develop hydropower projects in Tamakoshi River basin. After the completion of Upper Tamakoshi project, it is planning to divert the Rolwaling river to the Upper Tamakoshi intake which will increase the energy production. Also, the company has obtained the survey license of of Tamakoshi V (100 MW) and Upper Tamakoshi A HEP 45 MW. It has planned to develop these projects in future.

MY OPINION:- This is where I see the problem. Generally, hydropower companies go for bigger projects once they construct a project. Hydropower companies have to go that way since projects are constructed in BOOT model. But this company does not have bigger projects in future. If you look at the financial, Upper Tamakoshi will have a cash reserve of around 10.7 billion at the end of fifth year even after distributing cash dividend of around 50 percent per year. NPR. 10.7 billion is enough equity to develop a project with a capacity of 400 MW.

5) IPO

Without any doubt, Upper Tamakoshi IPO is the much awaited IPO in the history of Nepal.

10 percent of total issued capital or 10,590,000 shares have been allocated to the resident of Dolkha district. The maximum number of shares one can apply in this category is 70.

Similarly, 24 percent of the total issued capital or 25,416,000 shares have been reserved to the employee of Nepal Electricity Authority, Upper Tamakoshi Hydropower Company, Employee Provident Fund, Citizen Investment Trust, Nepal Telecommunication, Rastriya Beema Sansthan and the depositors of Employee Provident Fund. In this category, one can apply up to five thousand shares.

Applications for these two categories have already started. Please be informed that the shareholder of these categories will have a lock-in period of three years from the date of allotment.

The final category is for general people. 15 percent of the total issued capital or 15,885,000 shares will be floated to general public.

As for the timing, IPO for general public will start within 6 months from now.  

6) Share Price Speculation

No doubt, the application for share will be oversubscribed. I will be surprised if Upper Tamakoshi IPO does not make any record when it is floated in the market.

Some analyst are predicting that the share price of Upper tamakoshi will be around NPR 5,000 (NPR. 100 is the face value). 

I believe there are so many factors rather than mere speculation.

a) Price earning ratio:- The industry average for Nepalese hydropower is around 40. If we multiply the projected EPS of Upper Tamakoshi by 40, then it is safe to say that (65x40) NPR 2,600 is the safe bet.

b) Demand and supply factor:- This will also play an important factor for determining the share price. Locals can apply up to 70 shares each and the employees and depositor of EPF can apply up to 5,000 shares. Similarly, general public are eagerly waiting for this IPO. I believe shares will be scattered among millions of investors. But the actual number of shares held by an individual will be less. So imagine buying 1,000 shares in secondary market when it is listed in Nepal Stock Exchange. I bet you will find hard getting that number. This will certainly increase the share price.

MY OPINION:- By analyzing the current market situation and the financial of the company, I would say it is safe to say that the share price will stay at NPR 3,000. However, to maintain this price is a challenge. As I mentioned earlier, the main drawback is the future projects. As of now, Upper Tamakoshi does not have bigger projects in future. There is a risk that Upper Tamakoshi might be sitting in a big pile of idle cash without much prospect for investment. 

MY FINAL VERDICT:- If you stick an air pump into the Chilime hydropower and blow up as hard as you can, you will end up with upper tamakoshi. Yes, the project size and structures are big but the ratios are literally the same. It is very very safe to say that Upper tamakoshi share will be no less than the share price of Chilime hydropower. This means, investors can expect handsome return. And yes, this project will help to minimize the load shedding in the country when it comes into generation in 2016. Overall, this project has a lot to offer in terms of financial return to investors and energy to the country.

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Happy Investing!