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The Pakistan Credit Rating Agency Limited

Date
22-Dec-2017
Analysts
Rai Umar Zafar
rai.umar@pacra.com

Muhammad Hassan
muhammad.hassan@pacra.com

+92-42-35869504
www.pacra.com
Applicable Criteria

  • Correlation between long-term and short-term rating scale (Jun 17) [View]
  • Methodology | Independent Power Producers (IPP) (May 17) [View]

Related Research

  • Sector Study | Power Generation (Mar 17) [View]
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PACRA Maintains Entity Ratings of Engro PowerGen Thar (Pvt.) Limited
 Rating Type Entity
Current
(22-Dec-2017)
Previous
(21-Jun-2017)
 Action Maintain Maintain
 Long Term A A
 Short Term A1 A1
 Outlook Stable Stable
 Rating Watch - -

Engro Powergen Limited (EPL) along with China Machinery & Engineering Corporation (CMEC) is setting up first Thar coal based (2 x 330 MW) power plant (Complex) - Engro Powergen Thar (Pvt.) Limited (EPTL). The project achieved financial close (FC) in Apr-16 and the project's contracted COD is in Oct-19. However, management is aiming for COD in Jun-19 on best efforts basis. RCOD is Jun-19 as per PPA and delay LDs will apply if this date is exceeded. Nevertheless, in case of any delays, LDs will be paid through shareholders' ROE. The primary fuel is Thar Coal; however, the plant can accommodate imported coal. A 30 year coal supply agreement is signed with Sindh Engro Coal Mining Company (SECMC), which is constructing a coal mine in Thar Block-II. The mine’s contracted COD is Oct-19, though the management is targeting COD by June-19. As of Nov-17, the actual progress is 58.88% versus planned progress of 55.19%, based on the shorter 38-month schedule. The financial strength and experience in energy chain of the sponsoring companies – EPL and CMEC – is positive to the ratings. The onshore EPC contract is with CERIECO and offshore EPC contract is with CMEC. Comfort is drawn from the experience of these contractors and the involvement of Pakistan and Chinese governments, as this project comes under CPEC. The ratings incorporate the project’s exposure to the completion risks of multiple affiliated infrastructure projects needed for the successful commissioning of the Complex. Once completed, the Company’s main challenge would be to keep the plant operational. Off take agreement is with NTDC, which will, upon plant’s availability as per contract, provide capacity payments even if no purchase order is placed. The Government of Pakistan has given payment guarantee against dues from NTDC. The business risk of the company is exposed to the specifications of Thar Coal, which is being used for the first time. However, use of CFB Boiler by the Company largely covers the risk of varying lignite quality.

The management’s ability to effectively manage EPC risks provides comfort. Ensuring timely commissioning of the project would remain critical, which, once achieved, would be ratings positive. Moreover, timely completion of the affiliated infrastructure projects needed to make the plant operational and the viability of Thar Coal is critical. External factors such as any adverse changes in the regulatory framework or material delay in achieving CoD may impact the ratings.
About the Entity
EPTL, incorporated in September 2014, is setting up a 2 x 330 MW Coal-based Power Plant under the 2015 Power Policy. The Company is a special purpose vehicle. It will be the first indigenous coal based Power Plant of Pakistan in Thar Block – II, Sindh, for a total cost of USD 1.1bln, having a D/E ratio of 75:25. EPTL's majority ordinary shares are owned by Engro Powergen Limited (EPL) (50.1%) and China Machinery Engineering Corporation (CMEC)(35%), while the remaining stake is owned by Habib Bank Limited (HBL) (9.5%) and Liberty Mills Limited (LML) (5.4%). Engro Powergen Limited (EPL) is 100% owned subsidiary of Engro Corporation.
The nine member board, including EPTL’s CEO, has five representatives of EPL, three of CMEC, and one of HBL. The CEO, Mr. Ahsan Zafar Syed has experience of over two decades in engineering, procurement & construction management, and project management.
The primary function of PACRA is to evaluate the capacity and willingness of an entity to honor its obligations. Our ratings reflect an independent, professional and impartial assessment of the risks associated with a particular instrument or an entity. PACRA's comprehensive offerings include instrument and entity credit ratings, insurer financial strength ratings, fund ratings, asset manager ratings and real estate gradings. PACRA opinion is not a recommendation to purchase, sell or hold a security, in as much as it does not comment on the security's market price or suitability for a particular investor.
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