September 10, 2018 (MLN): Hub Power Company Limited plans to arrange and provide a bank guarantee to Private Power & Infrastructure Board (PPIB) to cover the obligations of Thar Energy Limted (TEL) for $2,310,000 for a period up till June 2019, subsequent to approvals from the shareholders of Hubco.
Thar Energy Limited, a wholly owned subsidiary of Hub Power Company Limited, is primarily involved in the development, ownership, operation and maintenance of a 330 MW mine mouth coal fired power plant that is to be established at Thar Block II, Thar Coal Mine, Sindh for a total cost of about $520 million.
According to an announcement on the PSX by Hub Power Company Limited, TEL has received a commitment from Sindh Engro Coal Mining Company Limited (“SECMC”) for mining of coal in Thar Block II (Phase II) for supply of 1.9 million ton per annum of Thar Lignite coal for sustainable operations of the Thar Plant.
Hub Power Company informed that it has entered into a Shareholders’ Agreement on March 15, 2018 with Fauji Fertilizer Company Limited (“FFC”), CMEC TEL Power Investments Limited Emirates (“CMEC Dubai”) as shareholders with China Everbest Development International Limited (“CMEC HK”) as the Sponsor.
The Shareholders’ Agreement provides for investment in the equity of TEL by each of the shareholders such that the shares of TEL will be distributed as follows: the Company holds 60% of the total shareholding of TEL, FFC holds 30% and CMEC Dubai holds 10%. The Company, FFC and CMEC HK would be collectively referred as (“Sponsors”).
Pursuant to the proposal submitted by TEL on April 05, 2016 for setting up the power plant in Thar, Private Power & Infrastructure Board (“PPIB”) issued a Letter of Support (“LOS”) on December 9, 2016.
As per the terms of the LOS, the Company provided performance guarantee amounting to USD 1.65 million in favour of PPIB. TEL then requested PPIB to provide an extension in the Financial Closing date i.e. till September 8, 2018 (Extended Financial Closing date).
On June 21, 2018, PPIB approved the extension in the financial closing date till September 8, 2018 and also approved the extension in the Closing date till March 31, 2021. To fulfil the requirements to obtain LOS extension from PPIB, Hub Power Company Limited doubled the performance guarantee amount from USD 1.65 million to USD 3.30 million till December 31, 2018.
TEL is currently in negotiations with its lenders for the finalization of financing arrangements, however, considering the challenges faced with regards to financing arrangements, TEL has requested PPIB for further extension in the Financial Closing Date under LOS for at least six months from September 8, 2018 to March 8, 2019.
Therefore, Hub Power Company Limited is required to extend the tenure of the Performance Guarantee from Dec 2018 to June 2019. Previously, the guarantee was based on Hubco’s 100% Shareholding in TEL as at that time the equity was not injected by FFC and CMEC. FFC has injected its equity portion in TEL on April 17, 2018.
CMEC Dubai has yet to contribute its portion of equity representing 10% of the total equity interest in TEL, which has resulted in HUBCO and FFC holding 70% and 30%, respectively.
Based on the equity contribution, the company is required to extend the guarantee for 70% of the LOS guarantee amount i.e. USD 2,310,000/- for which shareholders’ approval is being sought.
According to Hubco, Mr. Khalid Mansoor, CEO and Mr. Iqbal Alimohamed, Director of Hubco are also on the Board of Thar Energy Limited.
With respect to the coal power plant project that Thar Energy Limited is working on, Hubco informed that work on that project has already commenced and it is expected to commercially operate by March 2021 and will thereafter start paying returns on this investment after the project completion date and subject to TEL lenders’ approval. In terms of the benefits to the investing company i.e. Hubco, the project is being set under the 2015 Power Policy which is anticipated to bring an IRR of 20% in USD following the Commercial Operation Date of the project.
The company also said that the investment in the project would be made as and when needed, i.e. as required by the lenders of TEL, till the project completion date of the project being set up by TEL currently. Hubco has worked out that the cost of funds, if provided through borrowings, would be much less than the 20% Internal Rate of Return (IRR) it expects to generate from the project.
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