The Pakistan Credit Rating Agency Limited
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Hashim Yazdani

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PACRA Upgrades Entity Ratings of Thar Energy Limited

Rating Type Entity
(25-Oct-23 )
(16-Feb-23 )
Action Upgrade Upgrade
Long Term AA- A
Short Term A1 A2
Outlook Stable Stable
Rating Watch - -

The Hub Power Company Limited (HUBCO) of Pakistan along with Fauji Fertilizer Company Limited (FFCL), has set up a 330MW, mine-mouth lignite-fired power plant at Thar Coal Block-II Sindh, under the umbrella of Thar Energy Limited (TEL). Both major shareholders collectively represent 90% shareholding, and have very strong presence, as also reflected by their Entity Ratings (AA+). The upgrade not only depicts the commissioning of the plant but also the fact that the plant is part of the China Pakistan Economic Corridor (CPEC) and is fueled by coal extracted from Thar Block-II by the Sindh Engro Coal Mining Company. Being on local coal the plant reduces dependence on imported fuels and resultantly positively affects the overall basket price of the electricity generated. The plant is prioritized in the merit order list by NTDC, which also translates into the assigned ratings. Additionally, the plant efficiency and utilization factor are high. Previously, the evacuation issue from the Thar Block, now stands resolved by NTDC, as a result the plant is supplying uninterrupted electricity to the National Grid, which further provides comfort. Furthermore, the financial strength and experience in the energy chain of the sponsoring companies validates the upgrade. TEL has been awarded an upfront tariff, with the payments to be received from CPPA-G against Energy and Capacity, backed by the sovereign guarantee. The plant successfully achieved its Commercial Operations (COD) on 1st October 2022. As per the Power Purchase Agreement (PPA), CPPA-G has charged Liquidated Damages (LD) to the Company for the delay in COD from the required date. In accordance with the agreement, Hub Power Services Limited (HPSL) an associated company will provide Operations and Maintenance (O&M) services for the plant. The O&M contractor will be responsible for maintaining the operational benchmarks (Availability: 85%, Efficiency: 37%). During FY23, the plant generated net electrical output of 1,045GWh while maintaining its operational benchmarks. Repayment against the project debt has started which will be completely repaid over a period of 10 years. The smooth operations of the plant since its COD and timely payment of the debt is also an added consideration to the ratings. The plant is expected to receive payments from CPPA-G on a priority basis considering its importance to the energy sector. Currently the working capital requirements are managed through mix of internal cash generation and short-term borrowings from the banks. However, as per rising operational needs, the Company plans on procuring further working capital financing in the near future, is in pipeline.
Going forward, the capacity of the Company to generate stable cash flows in order to make timely repayments against the project debt remains crucial. Further, with rising concerns about circular debt, the trend of payments received from CPPA-G against invoices and any, regulatory changes might impact 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 situated 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 two decades of experience in the energy and manufacturing sectors. He holds an MBA degree in Finance. The actual cost of the project stands at USD 520mln. The debt financing constitutes 75% of the project cost i.e., USD 390mln, which has been financed through the consortium of local and foreign financial institutions. The equity financing constitutes remaining 25% of the project cost i.e., USD 130mln, which has completely been injected through the sponsors.

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.