The Pakistan Credit Rating Agency Limited
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Hamza Ghalib

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PACRA Assigns Preliminary Rating to Engro PowerGen Thar (Private) Limited | Privately Placed Sukuk of PKR 4,000mln (inclusive of Green Shoe option of PKR 2,000mln)

Rating Type Debt Instrument
Action Preliminary
Long Term A
Short Term -
Outlook 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). Management is aiming for COD in Jun-19 on a best efforts basis. 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 Feb-19, the actual progress is 99.15% based on the shorter 38-month schedule. The company has successfully tested and synchronized its first unit in March-19 and the second unit in April-19 whereby power plant has successfully been connected to and provided electricity to the grid. However, various reliability and performance related tests are under process as a part of a critical test run. The financial strength and experience in the energy chain of the sponsoring companies – EEL and CMEC – is positive to the ratings. The onshore EPC contract is with CERIECO and offshore EPC contract is with CMEC. Offtake agreement is with NTDC, which will, upon plant’s availability as per contract, provide capacity payments even if no dispatch is required by them. The Government of Pakistan has given payment guarantee against dues from NTDC under the Implementation Agreement.
The management’s ability to effectively manage EPC risks provides comfort. Moreover, the 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. EPTL's majority ordinary shares are owned by Engro Energy Limited (EEL) (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 Energy Limited (EEL) is 100% owned subsidiary of Engro Corporation.

About the Instrument
The Company plans to arrange PKR 4,000mln through the issuance of rated, secured, and privately placed Sukuk (inclusive of Green Shoe option of PKR 2,000mln). The proceeds of the Sukuk will be utilized for financing the working capital requirement of EPTL. The tenor of the instrument will be five (5) years starting from the issuance of Sukuk, carrying a mark-up rate of 3 months KIBOR plus 1.10 %. The Sukuk will be having a grace period of around 3 years from the expiry of availability period or complete drawdown, whichever is earlier. The principal will be paid in quarterly installments. 25% of the issue will be redeemed at the end of third (3rd) year, 25% of the issue will be redeemed at the end of fourth (4th) year, while 50% of the issue will be redeemed at the end of fifth (5th) year. The instrument is callable in the last month of every year until the expiry of tenor subject to not less than 30 days prior notice to investors. Sukuk is secured by way of First Charge over Project Assets with a margin of 20%. The book value of the asset was estimated at USD 1.1bln based on erstwhile Rupee Dollar parity.

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.