April 18, 2019: Pakistan Credit Rating Agency has assigned preliminary ratings to Hub Power Company Limited’s debt instrument at ‘AA+’ for long-term and ‘A1+’ for short-term.
The ratings reflect The Hub Power Company Limited (HUBCO) as one of the largest power producers in country. It aims to expand its generation capacity to boost country's power generation by utilizing Pakistan's indigenous natural resources.
The company is setting up new coal power plants i.e. China Power Hub Generation Company (CPHGC) which is a 2x660MW coal fired power plant at Hub, Thar Energy Limited (TEL) which is a 330MW mine-mouth coal fired power plant at Thar and Thalnova Power which is a 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 is increasing up to 46% through exercise of call option. This is being financed through multiple avenues.
One leg of it is being covered through a right issue of Rs. 7 billion. The right is being bridged by a short-term loan of Rs. 3.5 billion and a CP of Rs 3.5 billion – the borrowing has a lien on right on subscription account in favour of IPA (Issuing & Paying Agent).
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 Rs. ~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.
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 the company’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.
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