PACRA Revises Entity Ratings of Chanar Energy Limited

Chanar Energy operates a 22MW co-generation bagasse-based renewable energy power plant, with a net rated capacity of 20MW, producing both electricity and steam. The Company’s volatile performance is underpinned by demand risk coverage through long-term contractual arrangements, including an Energy Purchase Agreement (EPA) with CPPA-G and a Bagasse Supply and Steam Purchase Agreement with Chanar Sugar Mills Limited (CSML), a related entity. However, procurement of raw material, solely from the associated concern, Chanar Sugar Mills, is posing constraints on the generation capability and cash flow stream of the Company. However, due to challenges in the procurement of bagasse, mainly driven by a sharp increase in pricing, the Company is exploring a strategic shift towards biomass energy, specifically wheat husk. In August 2024, NEPRA issued a decision to index bagasse prices to coal, leading to an adjustment in the Fuel Cost Component (FCC) to PKR 12.4788/KWh for the period from October 2023 to September 2024, with a bagasse price of PKR 10,000/ton. The main risk affecting return stability is the potential for bagasse prices to exceed the price assigned by NEPRA in the fuel component of the tariff. When actual bagasse prices are higher than the assigned price, the delta creates additional costs for the power producer that are not reimbursed by the fixed tariff. This risk leads to reduced profit margins, financial instability, and potentially lower returns on investment, as the revenue from electricity generation does not adjust to cover the increased fuel costs. During 9MFY25, the Company generated no electricity, compared to 26,633 MWh produced in FY24. This decline was attributed to reduced bagasse availability, owing to CSML’s limited crushing operations, which lasted only nine days. Consequently, the Company’s revenue declined significantly to PKR 47 million in 9MFY25 from PKR 1,219 million in FY24. Profitability metrics also weakened during the period. Net margins were adversely affected by rising financing costs resulting in a net loss which in turn weakened free cash outflows and strained coverage ratios. The Company continues to exhibit high leverage, as it holds project-related debt of PKR 2,200 million, repayable in 40 quarterly installments, of which 24 have been repaid to date.
The ratings signifies the prevailing uncertainty pertinent to the Company’s financial muscles and timely debt servicing. The ratings are dependent on Chanar Energy’s ability to successfully convert biomass and electricity generation; any further deterioration in margins, leading to weak coverages and pressure on liquidity, will have a negative impact on ratings. Financial support from sponsors remains imperative in the long term.

About the Entity
Chanar Energy was incorporated in 2014 as an independent power producer. The EPA between the Company and the Power Purchaser was signed in Apr'2017. The term of EPA anticipates expected useful life of plant at 30 Years from its COD. The plant achieved its COD in Feb'2019. The Company is majorly owned by Mr. Javed Ahmad Kayani and his family. The Company's Board of Directors consists of four members, all from the Kayani family. Mr. Javed Ahmad Kayani serves as both the Chairman of the Board and the CEO, leading the Company.