PACRA assigns preliminary rating to HUBCO

September 26, 2019: Pakistan Credit Rating Agency (PACRA) has assigned initial entity rating of ‘AA+’ for long term to Hub Power Company Limited, while the short term rating is ‘A1+’. Meanwhile the outlook forecasted on this rating is ‘stable’.

As per an official press release by the agency on this occasion, the rating reflects the holding company character of HUBCO with an exclusive focus on the different dimension of the energy sector. In addition to the investment book, it itself is a large RFO based power plant.

It aims to expand generation capacity to boost the country's power generation by utilizing Pakistan's indigenous natural resources. It is setting up new coal power plants:

1. China Power Hub Generation Company (CPHGC): 2x660MW coal fired power plant at Hub
2. Thar Energy Limited (TEL): 330MW mine-mouth coal fired power plant at Thar
3. Thalnova Power: 330MW mine-mouth coal fired power plant at Thar

CPHGC is being developed under a joint venture with China Power International Holdings Limited (CPIHL). HUBCO also has investment in Sindh Engro Coal Mining Company (SECMC). These investments are being funded through a mix of short term and long term debt. The proportion of debt in the funding plan is predominant when compared to fresh equity of PKR 7bln. It has working capital related borrowing as well.

It is issuing another commercial paper up to PKR 5bln, which is effectively a replacement of an earlier commercial paper due in Oct-19.The overall debt quantum in the wake of fresh investment is huge. The cash flows of the company can sustain the burden, which will be complemented by expected dividend inflows. The cash flows are taking positive benefit for the enhanced capacity payments, emanating from quarterly indexation. The management has forecasted sizable net cash position, reflecting dividend inflow from subsidiaries; materialization of same is crucial.

HUBCO pays dividend, which in an eventuality is an available resource, as evidenced by recent history. It has used short term debt instruments and intends to raise borrowing through privately placed sukuk. These streams are already accounted for in the funding plan.

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.