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The Pakistan Credit Rating Agency Limited

Date
30-Dec-2016
Analyst
Aisha Khalid
aisha@pacra.com

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

  • Rating Modifiers | Outlook and Rating Watch (Jun 16) [View]
  • Correlation between Long-term and Short-term rating (Jun 16) [View]
  • Methodology | Independent Power Producers (IPP) (Jun 16) [View]

Related Research

  • Sector Study | Independent Power Producers (Feb 16) [View]
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PACRA Assigns Initial Entity Ratings to Engro PowerGen Thar (Pvt.) Limited
 Rating Type Entity
Current
(30-Dec-2016)
 Action Initial
 Long Term A
 Short Term A1
 Outlook Stable
 Rating Watch -

Engro Powergen Limited (EPL) along with China Machinery & Engineering Company (CMEC) is setting up a 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 contracted COD is Oct-19. The management is expecting CoD on Jun-19 – RCOD date. Nevertheless, in case of any delays, the sponsors have agreed to pay first four months’ delay LDs. The primary fuel is Thar Coal; however, the plant can also 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-16, the project is ahead of schedule, leaving the initial contingency amount intact; thus a higher proportion of the contingency fund for the remaining work. 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 also 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, who 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 is also 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 the 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. Furthermore, 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 2002 Power Policy. The Company is a special purpose vehicle under EPL. 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. EPL and CMEC are the main sponsors. Various other companies have shown interest to put up power plants in Thar Block-II. This reflects increased investor confidence for setting up of power plants based on Thar coal.
The nine member board, including EPTL’s CEO, has five representatives of EPL, three of CMEC, and one of HBL. The CEO, Mr. Shamsuddin Sheikh has 25+ years of experience in manufacturing, sales, supply chain, and project management and has been with Engro since the start of his career.
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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