The Pakistan Credit Rating Agency Limited
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Raniya Tanawar

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PACRA Maintains Entity Ratings of Pak-Arab Pipeline Company Limited

Rating Type Entity
(23-Nov-19 )
(24-May-19 )
Action Maintain Maintain
Long Term AAA AAA
Short Term A1+ A1+
Outlook Stable Stable
Rating Watch - -

The ratings are a reflection of PAPCO’s distinctive business model deriving its strength from a tariff based return structure. PAPCO operates a 786 Km pipeline network dedicated for White Oil Pipeline (WOP). The tariff follows a pre-defined pattern, determined in US$ by the GoP, providing sustainability to the company’s profit base and certain cushion against exchange rate volatility. PAPCO has been operating its WOP for High Speed Diesel (HSD) at a capacity utilisation of ~43% in FY19 (FY18: ~57%) - which is expected to boost up as soon as MOGAS project comes to play. Company’s envisaged pipeline up-gradation plan for the transportation of Motor Gasoline (MOGAS) is expected to be completed by Dec'19. The expansion is debt driven; from syndicate local debt and foreign borrowings. Leveraging is therefore, building and is expected to go up when foreign currency loan draw-downs is completed in 2020. The ratings, however, draw comfort from the sizeable short term investment book on the balance sheet, mitigating liquidity risk and providing ample room to keep the debt coverages strong. Tariff assigned for MOGAS project is also determined in US$; all set to be operational by early 2020. This will also create strategic advantage for the country. The cash flows of the company are persistently strong, stemming from formidable profitability margins. As the petroleum industry observed a decline, business volumes of PAPCO displayed a down-slide during FY19 owing to low offtake of HSD. The management, is however, confident, to witness revival in the coming periods on the back of MOGAS project. The pipeline capacity to transport is 8mln tons of the commodity/annum, which can be increased up to 12mln tons/annum, considered to be sufficient to meet the upcountry’s demand. The company's governance structure derives full benefit from its association with PARCO, which also deputes its functionaries in PAPCO, with Shell Pakistan Limited nominating the CFO.
The ratings are dependent on sustained business model and its share in the overall country’s petroleum movement. Sustainability in system share remains vital for the ratings. Completion of the MOGAS project and execution thereof is also important. Meanwhile, adherence to strong performance indicators is imperative.

About the Entity
Pak-Arab Pipeline Company Limited (PAPCO) was incorporated in 2000. PAPCO’s majority holding lies in the hands of PARCO - 51%, which is majorly owned by GoP, while remaining by Shell Pakistan Limited (26%), PSO (12%) and Total PARCO Marketing Limited (11%). PAPCO operates a cross-country pipeline system to transport refined High Speed Diesel from Karachi ports to mid-country. It has the flexibility to receive imported and locally produced HSD products from multiple sources and to deliver it at different demand centers. The pipeline was commissioned in March 2005, comprising 786 Km 26” dia cross-country pipeline, storage tanks, pumps and other allied facilities.
The Company’s overall control is overseen by ten-member board of directors (BoD), representing all the shareholders. The Chairman of the board is nominated by PARCO. Mr. Shujauddin Ahmed, Chief Executive Officer (CEO), is a qualified Engineer with more than four decades of experience in related fields. He took charge as the CEO-PAPCO in early 2017 and has been aptly deploying his expertise since then

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.