April 19, 2017

Tangsibji Hydro Energy Limited

Instruments* Amount Rated Rating Action
(in Rs crore)
Term Loans 353.00 [ICRA]BBB- (Stable); assigned
*Instrument details are provided in Annexure-1

Rating action

ICRA has assigned a long-term rating of [ICRA]BBB- (pronounced as ICRA triple B minus) to the Rs
353 crore1 Term Loans of Tangsibji Hydro Energy Limited (THyE)2. The outlook on the long-term rating
is Stable.

Detailed rationale

The rating action takes into account the strong parentage of THyE, which is developing a 118 MW run of
the river hydro electric project (HEP) in Trongsa Dzonkhag in Central Bhutan. THyE is promoted by
Druk Green Power Corporation Limited (DGPCL, rated at IrBBB+ with Stable outlook) which in turn is a
wholly-owned Kingdom of Bhutan enterprise. The rating derives comfort from the strong operational and
financial profile of DGPCL, which owns and operates 1606 MW of hydro power capacity (126 MW
through PPP) in Bhutan. The project is at a nascent stage with cumulative progress of 5% till February
2017. On the positive side, the company has signed a long-term power purchase agreement (PPA) with
PTC India Limited (PTC) which limits the off-take and counter-party credit risks given that PTC (rated at
[ICRA]A1+) is a credit worthy off-taker. The single part first year tariff of Rs. 3.30 per unit and levelised
tariff of Rs. 4.05 per unit is quite attractive, which coupled with the provision of deemed generation
clause in the PPA is a source of comfort that further mitigates off-take risks to an extent. The rating also
derives strength from the potential for additional generation amounting to around 66% of the project's
design energy from discharge of the Nikachhu stream to the Mangdechhu river, which presents further
upside to the project's returns. The funding risks for THyE are minimal as the entire debt has been
sanctioned and equity portion has been brought in by the promoters.

These credit strengths though are tempered by significant execution risks which are typical in
construction of any hydro electric project. However, given the strong management expertise and
experience in working in similar terrain, the same are mitigated to an extent. ICRA notes that THyE will
have to find a buyer for its balance 20% of net generation (long-term PPA signed for only 80% of the
capacity excluding auxiliary consumption and royalty energy), and its ability to find a long-term buyer for
this residual capacity remains a key rating lever. The rating concerns also emanate from the exposure of
the company to foreign currency fluctuations as 54.3% of the sanctioned loan (portion sanctioned by
Asian Development Bank, [ADB]) is dollar denominated. The balance loan is INR denominated and the
exchange rate of Bhutanese currency Ngultrum (Nu.) is fixed with respect to INR at a conversion ratio of
1:1. The loan has been sanctioned at INR 60 per US$ while the prevailing exchange rate is INR 65 per
US$. There are no financial hedging instruments available in Bhutan, and the only mitigant is the creation
of a forex fluctuation reserve during the operational phase, which will act as a buffer for future foreign
exchange fluctuations. However, DGPCL's commitment to bring in additional funds to meet potential
debt-service shortfalls as well as breaches in DSCR trigger levels, strengthen THyEs credit profile.

1
100 lakh = 1 crore = 10 million
2
For complete rating scale and definitions, please refer to ICRA's website www.icra.in or other ICRA Rating Publications
ICRA observes that part funding of equity portion through grant, coupled with the low cost and long
tenure of the ADB loan translates into financially strong project parameters. However, timely execution
of the project within the budgeted time and cost estimates would be the biggest rating drivers for the
company.

Key rating drivers

Credit strengths
THyE is a wholly-owned subsidiary of Druk Green Power Corporation Limited (DGPCL, rated at
IrBBB+/Stable)
Tie-up of 80% of the Nikachhu projects generation capacity (net of royalty energy) with PTC India
Ltd. (rated at [ICRA]A1+) against long-term power purchase agreement having deemed generation
clause, largely mitigating off-take and counterparty risks
Upfront infusion of DGPCLs entire equity contribution, along with funding tie-up of project debt,
mitigating funding risks
Competitive tariff for long-term power sale, long tenured loan at competitive rate and funding of
~13% of the project cost as grant significantly augment the projects attractiveness
Potential for additional generation from discharge of the Nikachhu stream to the Mangdechhu river
provides further upside for project returns
Sovereign guarantee by the Government of Bhutan on the ADB loans, along with commitment from
DGPCL to bring in additional funds to meet potential debt-service shortfalls as well as breaches in
DSCR trigger levels, strengthens THyEs credit profile

Credit weakness
Exposure to execution risks, as the project remains at a nascent stage; at present, actual progress is
running a few months behind schedule
Exposure to off-take risks on the projects 20% unallocated power
Exposure to forex risks on account of the un-hedged dollar loan in its books; however, creation of
forex reserve mitigates such risks to a large extent

Detailed description of key rating drivers:

Incorporated on April 25, 2014, THyE is a wholly-owned subsidiary of DGPCL engaged in the
construction of the 118 MW Nikachhu hydroelectric project in Bhutan. After successfully commissioning
the 126 MW Dagachhu project, this is DGPCL's second such foray in developing hydroelectric projects
through the IPP route. ICRA derives comfort from THyE's strong parentage, which not only gives the
company the advantage to leverage from DGPCL's demonstrated experience in executing and operating
multiple hydropower projects in Bhutan, but also gives it considerable financial flexibility, given the
parent's strong financial and liquidity profile.

The budgeted cost of the Nikachhu project is US$ 198.2 million (mio.) (approx. Nu. 1189.4 crore), being
funded by a debt-equity mix of 65:35. The firming up of the entire project debt from ADB, State Bank of
India and EXIM Bank, along with upfront infusion of DGPCLs entire equity contribution largely
mitigates the funding risks. Additionally, the sovereign guarantee by the Government of Bhutan on the
ADB loans, along with creation of debt service reserve account (DSRA), coupled with DGPCL's
commitment to bring in additional funds to meet potential debt service shortfalls as well as breaches in
DSCR trigger levels, strengthens THyE's credit profile. Nonetheless, with the project's revenues to be
generated in INR and around 54.3% of the sanctioned loan (portion sanctioned by Asian Development
Bank, ADB) being dollar denominated, forex risks remain high. However, the same is mitigated to an
extent through the creation of a forex fluctuation reserve sufficient to meet 30% of forex debt servicing
falling due in the ensuing one-year period.

ICRA notes that despite the project's relatively high capital cost of Nu. 10.1 crore/MW, the equity IRR
remains attractive at around 16.2%3, being supported by the competitive tariff for long-term power sale,
long-tenure loan raised at competitive interest rate, and funding of around 13% of the project cost with
grant from ADB. Moreover, the potential for additional generation of 324 MU 4 (~66% of Nikachhu's
design energy of 492 MU) from discharge of the Nikachhu stream to the Mangdechhu river provides
further upside to project returns after the expected commissioning of the 720 MW Mangdechhu
hydroelectric project in 2018.

THyE has been able to firm up 80% of the Nikachhu projects generation capacity (net of royalty energy)
with PTC (rated at [ICRA]A1+) through long-term PPA having deemed generation clause. PTC has in
turn signed up back-to-back PPA with Assam Power Distribution Company Limited (APDCL), largely
mitigating off-take and counterparty risks. Moreover, ICRA believes that Assam's power deficient
condition, its healthy growth in power demand, coupled with the Nikachhu project's competitive tariff
(which is lower than APDCL's current pooled cost of power purchase) largely mitigates off-take risks for
supply against long-term PPA. However, THyE is yet to tie up 20% of the net capacity thus far, and
therefore willingness of PTC/APDCL to off-take this residual capacity, or allowing of cross-border
trading of power by the Government of India in future remains key rating drivers.

The project's construction remains at a nascent stage with cumulative progress of 5% till February 2017,
exposing it to execution risks. Such risks get accentuated given that the project's commissioning has
already been earlier deferred from July 2019 to March 2020, and that the progress achieved thus far is
further lagging behind by around four and a half months. Therefore, THyE's ability to mobilise additional
resources to speed up execution, and achieve critical milestones within budgeted time remains extremely
crucial. However, ICRA observes that given the advanced stage of construction of the Mangdechhu
project, and its proximity to the Nikachhu project, THyE will be able to leverage from this experience to
mitigate geological risks to the extent possible through better planning.

Analytical approach: While assigning the rating, ICRA has considered the consolidated financial profile
of DGPCL, THyE, Dagachhu Hydro Power Corporation Limited, and Bhutan Hydropower Services
Limited.

Links to applicable Criteria

Corporate Credit Rating Methodology

Rating Methodology for Independent Power Producers and Power Generation Projects

About the company:

Tangsibji Hydro Energy Limited (THyE) is a wholly-owned subsidiary of Druk Green Power Corporation
Limited (DGPCL) which in turn is a wholly-owned enterprise of the Government of Bhutan. The
company was incorporated on April 25, 2014 for development of 118 MW run of the river HEP on the
Nikachhu river in Trongsa Dzonkhag in Central Bhutan. The company has signed a PPA with PTC India
Limited for off-take of 80% of its generation capacity for 25 years while the balance 20% will be
marketed through DGPCL. Power will be evacuated through an 18.6 km long 132 KV transmission line

3
ICRA Estimate
4
MU: million units
to be developed by Bhutan Power Corporation Limited. Civil and hydro-mechanical works contract has
been assigned to Hindustan Construction Company while electro-mechanical works contract has been
awarded to Voith Hydro Private Limited. Royalty power to the Government will be 12% of net generation
in the first 12 years and 18% of net generation thereafter. The budgeted cost of the project is US$ 198.2
million (approx. Nu. 1189.4 crore) to be funded through a debt-equity mix of 65:35. The scheduled
commissioning date of the project is March 2020.

Status of non-cooperation with previous CRA: Not Applicable

Any other information: Not Applicable

Rating history for last three years:

Chronology of Rating History

Current Rating (FY2017)
for the past 3 years
S. Name of
Amount Amount Date & Date & Date &
No. Instrument Date &
Type rated (Rs. outstanding Rating in Rating in Rating in
Rating
Crore) (Rs. Crore) FY2016 FY2015 FY2014

April 2017
[ICRA]BBB-
1 Term Loan Long Term 353.00 22.78** - - -
(Stable)
**as on January 31, 2017

Complexity level of the rated instrument:

ICRA has classified various instruments based on their complexity as "Simple", "Complex" and "Highly
Complex". The classification of instruments according to their complexity levels is available on the
website www.icra.in
 Annexure-1
Details of Instrument

Size of
the
Date of Coupon Maturity Current Rating and
Name of the instrument issue
issuance rate Date Outlook
(Rs.
Cr)
10 year 6
Term Loan State Bank of
Nov 2016 11.35% months from 250.00 [ICRA]BBB- (Stable)
India
March 2020
10 year 6
Term Loan Exim Bank Undrawn** 11.35% months from 103.00 [ICRA]BBB- (Stable)
March 2020
Source: Company;** Undrawn as on March 31, 2017

Name and Contact Details of the Rating Analyst(s):

Analyst Contacts
Mr Sabyasachi Majudar Ritabrata Ghosh Siddhartha Kaushik
+91-124-4545604 +91-33-71501107 +91-124-4545323
sabyasachi@icraindia.com ritabrata.ghosh@icraindia.com siddhartha.kaushik@icraindia.com

Name and Contact Details of Relationship Contacts:

Mr. Jayanta Chatterjee
+91-33-71501100
jayantac@icraindia.com
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