PACRA Assigns Initial Ratings to Hub Power Company Limited | Short-term Sukuk of PKR 4.5bln

The ratings reflect The Hub Power Company Limited (Hubco) as one of the largest power producers in the country. Hubco aims to expand its generation capacity to boost the country's power generation by utilizing Pakistan's indigenous natural resources. Hubco is setting up new coal power plants (i) China Power Hub Generation Company (CPHGC): 2x660MW coal fired power plant at Hub, (ii) Thar Energy Limited (TEL): 330MW mine-mouth coal fired power plant at Thar and (iii) Thalnova Power: 330MW mine-mouth coal fired power plant at Thar. Hubco's 2x660MW coal fired power project is being developed under a joint venture with China Power International Holdings Limited (CPIHL). Under this project, Hubco has currently 26% stake which it plans to increase its shareholding up to 46% through exercise of call option. Hubco incorporated Thar Energy Limited to undertake its 330 MW open-mine mouth coal power plant in Thar. Moreover, they have also acquired 38.3% stake in Thalnova Power through Hub Power Holdings Limited. Hubco has arranged long-term debt facility of PKR ~26.5bln in 2017 to finance its growth projects i.e. CPHGC, TEL & SECMC. Due to substantial devaluation of Pakistani rupee, requirement to inject funds in these projects increased due to which the company plans to finance the excess portion of the projects equity by securing new debt instruments. In addition to the previously issued CP Sukuk of PKR 4bln, the company has issued another short-term Sukuk amounting up to PKR 4.5bln used for investment in long-term projects and working capital requirements of Hubco, so that enough cushion can be created in the available short-term lines of the Company. Hubco has also expressed its intention to continue to tap this market. Although this would increase leveraging, matching repayments with project returns should help manage the financial risk profile. Long-term vis-à-vis EBIT is manageable.
Comfort can be drawn from Hubco’s moderately leveraged balance sheet and relatively free stable cash flows. Cash flow streams of Hubco's plants are guaranteed by GoP under the Power Purchase Agreement (PPA), subject to adherence to the agreed upon performance benchmarks; this provides comfort to the ratings. Timely completion of new projects, settlement of receivable and payable and maintaining healthy debt service coverages are important.

About the Entity
Hubco, a listed company, was incorporated in 1991. During the year, Dawood group, largest shareholder along with its associates sold its stake to Mega Conglomerate (Pvt.) Ltd, making Mega Conglomerate single largest shareholder (~19%). Mega Conglomerate (Pvt.) Ltd (19.4 %) is the single largest shareholder, followed by ABL (9.7%), Fauji Foundation (8.5%) and NBP (5%). Hubco holds 100% stake in Narowal Energy Ltd which operates a 225MW capacity oil-fired power plant at Narowal and 75% controlling interest in Laraib Energy Ltd that operates 84 MW hydel power plant. The BoD comprises eleven-members including the CEO of Hubco. BoD includes three representatives from Mega Conglomerate. Mr. Khalid Mansoor, the CEO, carries over three decades of experience in Energy & Petrochemical sectors in leading roles. He is supported by a team of experienced professionals.

About the Instrument
Hubco issued an unsecured, privately placed short term Sukuk of PKR 4,500mln on April 2nd, 2019. The short-term Sukuk, having a tenor of 6 months, carries a profit rate of 3MK + 100bps. The redemption will be in bullet at the time of maturity.