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Timnat Thomas

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PACRA Maintains Rating of Engro PowerGen Thar (Private) Limited | PP Sukuk

Rating Type Debt Instrument
(27-Aug-21 )
(28-Aug-20 )
Action Maintain Maintain
Long Term A A
Short Term - -
Outlook Stable Stable
Rating Watch - -

Engro Energy Limited (EEL) along with China Machinery & Engineering Corporation (CMEC) has set up the 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 COD in July-19. Since its COD, EPTL is running its operations smoothly and sustainably and exceeding operational benchmarks. 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 operating a coal mine in Thar Block-II. The coal mine’s COD was July-19. The Company's both units were successfully connected to and are providing electricity to the grid. The Company has successfully provided 2,175GWh of electricity to the grid in 1HCY20 as compared to 1,999 GWh in 2HCY19 showing a growth of ~8% in generation. The financial strength and experience in the energy chain of the sponsoring companies – EEL and CMEC – is positive to the ratings. EPTL has built its own financial strengths in a short span of time by adding to its equity base, consistent profitability and improved FCFOs support the timely repayment of debt. Strong cash position and un-utilized short term borrowing lines depict the healthy financial position of the Company. The onshore EPC contract is with CERIECO and the 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 power purchase agreement is with CPPA-G, which will, upon plant’s availability as per contract, provide capacity payments even if no off-take by the power purchaser. The Government of Pakistan has given a payment guarantee against dues from CPPA-G. The Company has successfully produced electricity on the specifications of Thar coal, which is being used for the first time. Furthermore, the use of CFB Boiler by the Company largely covers the risk of varying lignite quality.
The management’s ability to effectively manage EPC risks and COD provides comfort. The trend in operational profitability would bode well for rating. The availability of Thar Coal is critical. External factors such as any changes in the regulatory framework may impact the ratings.

About the Entity
EPTL, incorporated in September 2014, has set up a 2 x 330 MW Coal-based Power Plant under the 2015 Power Policy. The Company is a special purpose vehicle. It is 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 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 a 100% owned subsidiary of Engro Corporation.

About the Instrument
The Company issued a rated, secured, and privately placed Sukuk of PKR 3,000mln in Aug'19 for financing the working capital requirement of EPTL. The tenor of the instrument is five (5) years from the issue date inclusive of a grace period of two (2) years from the expiry of the availability period or complete drawdown, whichever is earlier. The profit is being paid quarterly in arrears at the rate of 3M Kibor+1.1% p.a. Principal will be paid in three instalments (two instalments of PKR 750mln and one of PKR 1.5bln) which will commence from three years after the issue in Aug'22. The instrument has a call option attached to it which will enable the Company to redeem the Sukuk issue in part or whole.

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.