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The Pakistan Credit Rating Agency Limited

Date
20-Apr-2017
Analysts
Rai Umar Zafar
rai.umar@pacra.com

Muhammad Hassan
muhammad.hassan@pacra.com

+92-42-35869504
www.pacra.com
Applicable Criteria

  • Rating Modifiers | Outlook and Rating Watch (Jun 16)
  • Correlation between Long-term and Short-term rating (Jun 16)
  • Methodology | Independent Power Producers (IPP) (Jun 16)

Related Research

  • Sector Study | Power Generation (Mar 17)
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PACRA Maintains Entity Ratings of The Hub Power Company Limited
 Rating Type Entity
Current
(20-Apr-2017)
Previous
(20-Apr-2016)
 Action Maintain Maintain
 Long Term AA+ AA+
 Short Term A1+ A1+
 Outlook Stable Stable
 Rating Watch - -

The Hub Power Company Limited (Hubco) is one of the largest power producers in the country contributing ~7% towards the total generation capacity of the country. Hubco aims to significantly expand its generation capacity this would give it a status of a power holdco, wherein, only Hub power plant would directly reside with it while other power plants would be managed through specific purpose, JVs/subsidiaries/associated companies. In this regard, the company has hived down its Narowal Plant into a fully owned subsidiary. The new structure while being transparent, would support financial flexibility. Hubco is in the process of setting up new coal power plants (i) 2x660MW coal fired power plant at Hub and (ii) 330MW mine-mouth coal fired power plant at Thar. Existing capacity of Hubco is expected to be doubled upon completion of these new power plants. Hub coal plants project is being developed under a joint venture with China Power International Holdings (CPIH). A separate JV company has been setup (China Power Hub Generation Company - CPHGC) to undertake this project. Currently Hubco has 26% stake in CPHGC. Hubco has incorporated Thar Energy Limited to undertake its 330 MW open-mine mouth coal power plant in Thar. Although, currently fully owned, Hubco is in the process of having equity partners. Company’s new projects will be financed in debt to equity ratio of 75:25. The company plans to finance equity portion of the project partly through internal cash-flows and by securing new debt. Although this would increase leveraging, matching repayments with project returns should help manage the pressure on financial risk profile.

Meanwhile, comfort is drawn from Hubco’s deleveraged 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 and maintaining healthy debt service coverages post acquisition of new debt will remain critical.
About the Entity
Hubco, listed on the Pakistan Stock Exchange, was incorporated in 1991. Dawood group is the largest shareholder (16.9%). It exercises significant control through dominant presence on the Board. Other major shareholders include Allied Bank (9.7%), Fauji Foundation (8.5%), and National Bank (4.8%) while the rest is well dispersed. Hubco currently operates i) an oil-fired power plant of 1,292MW at Hub site, and ii) a 225MW capacity oil-fired power plant at Narowal. Additionally, Hubco holds a 75% controlling interest in Laraib Energy Limited that operates 84 MW hydel power plant. Hubco has established a wholly owned subsidiary - Hub Power Services Limited (HPSL) - to manage the O&M. Hub plant's O&M was taken over in Aug-15 meanwhile Narowal's O&M was taken over in April-16. Hubco has successfully managed to meet performance benchmarks after consistent improvement via maintenance of its plants.

The BoD comprises fourteen-members including the CEO of Hubco. BoD includes seven representatives from Dawood Group. Mr. Khalid Mansoor, the CEO, carries 35 years of experience in Energy & Petrochemical Sectors. He is assisted by a team of experienced professionals.
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.