Lakdhanavi to rope in partner to fund 30% of project cost of Kerawalapitiya LNG plant

• Contract for LNG plant awarded this February; yet to sign PPA with CEB
• Fitch assigns Lakdhanavi first-time rating of AA+ with a Stable outlook

Lakdhanavi Limited, the country’s largest independent power producer, is expected to rope in a partner, who will infuse 30 percent of the project cost of the construction of the proposed 300MW diesel/LNG power plant in Kerawalapitiya, which was awarded to the company by the government this February. 

The contract was awarded on a ‘build-operate-own-transfer basis’, following a tender procedure, said Fitch Ratings in a recent rating note, which assigned Lakdhanavi a first-time rating of AA+, with a Stable outlook. 

However, the company, which is a subsidiary of LTL Holdings (Private) Limited (LTLH), is yet to receive the formal approval from the regulator and also is yet to sign the power purchase agreement (PPA) with the Ceylon Electricity Board (CEB). 

“We expect LTLH (the parent company of Lakdhanavi) to maintain its EBITDA/interest coverage above 2.5x over the next few years, based on the proposed funding structure. However, an increase in the investment or inability to find an equity partner could weaken coverage further and weigh on the rating,” Fitch Ratings said.

The rating of Lakdhanavi was based on the strong legal and operational linkages between its parent LTLH and it also reflects the latter’s leading market position in the country’s power sector. 

Other factors that weighed in for the rating include: stable cash flow generation stemming from fixed long-term operation and maintenance (O&M) contracts and PPAs and strong EBITDA margins offset by the small operating scale of its business segments, other than O&M and power generation, which are inherently more volatile.

Lakdhanavi, despite its scale and reach, hasn’t built a sizeable power plant in Sri Lanka for the last six years and the company lost this project in 2019, even after making the lowest bid, forcing it to seek legal redress. 

However, the company was awarded the project this year, overturning an earlier decision by the Cabinet of the previous government, on the condition that the company would withdraw the petition against original awarding of the contract to a Chinese company, a news report said. 

Lakdhanavi currently operates three power plants in Bangladesh, including the latest one which was commissioned in late 2019, under the subsidiary Feni Lanka, which doubled its total Bangladesh capacity to 218 megawatts. All three plants have 15-year PPAs with the Bangladesh Power Development Board, providing the company with price security.  

The company currently does not have any large confirmed projects in its pipeline, except for the ongoing hydropower plant in Nepal. 

Fitch Ratings expects the company to have access to around Rs.13 billion in cash from a dividend, which will be free from any encumbrances by 2023, since this cash is currently restricted, as the rating agency expects LTLH to hold the dividend received from its associate West Coast Power Limited (WCPL) as a guarantee against any default of the project loan, due to a breakdown of the WCPL’s power plant. “The project loan will be paid off by 2022. We expect the company to use this cash to fund its future expansion,” Fitch Ratings added.