April 24, 2019 (MLN): VIS Credit Rating Company Limited (VIS) has assigned initial entity ratings of ‘AA-/A-1’ to Engro Powergen Qadirpur Limited (EPQL). Outlook on the assigned ratings is ‘Stable’.
The long term rating of ‘AA-’ signifies high credit quality; protection factors are strong. Risk is modest but may vary slightly from time to time because of economic conditions.
The short term rating of ‘A-1’ signifies high certainty of timely payment; liquidity factors are excellent and supported by good fundamental protection factors. Risk factors are minor.
The assigned ratings draw comfort from significant experience of EEL/Engro in executing similar projects. Moreover, ratings incorporate sound operational track record of the O&M contractor, EESL.
As projected in the implementation agreement, EPQL is now facing gas curtailment from Qadirpur gas field as it is depleting and has made its plant available on mixed mode i.e. comingling of gas and high speed diesel from September 7, 2018 onwards. Terms of the contract also allow conversion to alternate fuel; profitability and cash flows will not be impacted given that fuel cost component and conversion cost are pass-through.
Financial risk profile draws support from strong guaranteed cash flows and satisfactory debt servicing ability. However, persistence of circular debt may translate into some liquidity pressures. By end-2020, gearing levels are expected to decline with complete repayment of long term debt and increase in equity base.
Going forward, improvement in liquidity profile with respect to circular debt and satisfactory plant operation post conversion to alternate fuel will be key rating sensitivities.
