The Pakistan Credit Rating Agency Limited
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Taimoor Ahmad

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PACRA Maintains Entity Ratings of Sapphire Electric Company Limited

Rating Type Entity
Action Maintain Maintain
Long Term AA- AA-
Short Term A1+ A1+
Outlook Stable Stable
Rating Watch - -

The ratings reflect strong business profile of Sapphire Electric Company Limited (Sapphire Electric) emanating from the demand risk coverage under Power Purchase Agreement signed between CPPA-G (Central Power Purchasing Agency) and the company. Meanwhile, the Implementation Agreement provides sovereign guarantee for cashflows, given adherence to agreed performance benchmarks. Nevertheless, delayed payments from the power purchaser remained a challenge. The ratings incorporate low operational risk, a result of the performance of General Electric - the O&M operator. Primary fuel of the plant is Regasified Liquefied Natural Gas (RLNG) which is supplied by Sui Northern Gas Pipeline Limited (SNGPL). Thus fuel supply risk is considered adequate, pertaining to meaningful addition of RLNG in Pakistan’s fuel mix. Although there are delays in payments from power purchaser, the company manages the impact by aligning the payments to fuel supplier with its receipts. This keeps working capital needs under check. Short-term borrowing lines are available and mainly used to fund any short-fall in working capital requirements. As of Mar-19, short term lines utilization stood at 64%. Moreover, lately Sapphire Electric has been repaying its debt repayments (Principal and Markup) on time without availing benefit of forbearance period and committed to continue this practice till maturity. Sapphire Electric has outstanding long term debt of PKR 2,726mln as at end-June-19 payable till September-2020. The company's association with Sapphire Group provides comfort to the ratings.
Sustained good financial discipline and upholding strong operational performance in line with agreed performance levels remain important. Accumulation of circular debt would pose threat to the company’s ability to continue with this practice. However, the management ably supported by sponsors’ remains committed to sustain improvement in management of commercial obligations and timely debt repayments.

About the Entity
Sapphire Electric was established in 2005 as an independent power producer (IPP), with gross capacity of 225MW, is operating under the Power Policy 2002. It began commercial operations in October 2010. Sapphire Electric is a subsidiary of Sapphire Fibres Limited. Sapphire Group owns (70%) stake in Sapphire Electric mainly through Sapphire Fibres Limited (70%), while remaining stake is owned by Xenel Saudi Arabia (20%), Meezan Bank (5%) and few high net worth individuals (5%).

Sapphire Electric 's project cost comprised 25% equity and 75% debt. Long-term debt carries mark-up at the rate of 3M Kibor + 300bps, payable on quarterly basis. The outstanding principal at end-June 19, will be repaid in five quarterly installments.

The seven-member Board of Directors (BoD), including the CEO, is majorly composed of representatives from Sapphire Group, while Xenel is represented by one member. The board has played an active role in providing strategic guidance to Sapphire Electric and has been responsible for making key decisions. Mr. Shahid Abdullah, the CEO, also heads the parent company Sapphire Fibres Limited. He is supported by a professional management team.

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.