The Pakistan Credit Rating Agency Limited
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Shahmeer Dar

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PACRA Assigns Initial Entity Ratings to Thar Energy Limited

Rating Type Entity
Action Initial
Long Term A-
Short Term A2
Outlook Stable
Rating Watch Yes

Hub Power Company of Pakistan along with Fauji Fertilizer Company Limited, are setting up a 330MW coal power plant, under the umbrella of Thar Energy Limited (TEL). Both major shareholders (90%) reflect very strong credentials, as also reflected by their Entity Ratings (AA+). The financial strength and experience in the energy chain of the sponsoring companies is positive to the ratings, while the controlling interest lies with HUBCO. TEL has been awarded an upfront tariff, with the payments to be received from CPPA-G backed by the sovereign guarantee. China East Resource Import & Export Corporation and China Machinery Engineering Corporation are the EPC contractors; comfort is drawn that they have ~30 years of worldwide experience. Currently, project is exposed to completion risk, because till Aug-2020 ~57% construction work is completed. In addition, due to the lockdown in China (Hubei) in Jan-20, and the fact that both the contractors are of Chinese origin, the EPC Contractors served Force Majeure Event (FME) claim to TEL in light of the COVID-19 Pandemic. Improved Conditions and ease of lockdown as of now, has alleviated the risk. TEL has also notified the same to Central Power Purchasing Agency (CPPA) which, as per TEL’s representation, has been acknowledged. In case of delay in achieving the COD as per the contract, the EPC contractors will be liable to pay the liquidated damages. The Rating Watch signifies the prevailing uncertainty due to the outbreak of COVID-19 pandemic and delay in RCOD.
The EPC contractors have provided bank guarantees in the form of performance bond and warranty bond. These bank guarantees provide additional cushion for the sustainable financial risk profile. Further, the company will maintain the Debt Service Reserve Account, providing coverage of six months on its Long Term Loans till maturity. Moreover, the operations of the plant are exposed to resource risk, because the Thar Block II is under construction but SECMC (coal supplier) has notified to TEL that they are confident of completing construction before the COD of TEL and will supply them the required coal.
The Company has signed Power Purchase Agreement (PPA) with CPPA-G and as per the PPA, in case of no demand from the power purchaser, CPPA-G shall be liable to pay the capacity payments at applicable tariff rates. The Government of Pakistan has given payment guarantee against dues from CPPA-G. The Company has adequate insurance coverage to cover the risk of business interruptions, marine & erection, startup-delay etc. Furthermore, external factors such as any adverse changes in the regulatory framework or prolonged delay in achieving COD may impact the ratings.

About the Entity
Thar Energy Limited was incorporated in Pakistan on May 17, 2016 as a limited company under the repealed Companies Ordinance, 1984. The 330MW coal IPP is setting up in the energy park located in Block II of the Thar coalfields in Sindh. Mr. Saleemullah Memon is the CEO of the company. Mr. Memon has over twenty years of experience in the energy and manufacturing sector. Mr. Memon holds an MBA in Finance. The estimated cost of the project as per the NEPRA Tariff determination, is USD 497.7mln. Debt financing constitutes 75% of the project cost i.e. USD 372mln, which is financed from local and foreign financial institutions. Both the local loan and foreign loan has 10 years repayment period, with semiannual repayments. As per Private Power and Infrastructure Board (PPIB), the project achieved financial close in January 2020 and with original RCOD falling in March 2021, but due to FME claim from EPC contractors, COD will be delayed.

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.