Hubco to raise Rs6b via Sukuk

Move comes after delay in payments constrained company’s cash flow

Hub Power Company (Hubco), a leading independent power producer (IPP), has planned to float Sukuk to raise Rs6 billion from a consortium of Shariah-compliant financial institutions next month to meet day-to-day working expenditures.

The delay in receipt of overdue payments, including circular debt, has severely constrained cash flow of the company. Otherwise, the company’s profit rose during the financial year ended June 30, 2020.

“We have targeted to issue the Sukuk by mid-November,” a company official told a media gathering.

The debt to be raised through Sukuk would mostly be utilised to overcome the shortfall in working capital. “These days, Hubco is fully focused on launching two power projects of 330 megawatts each on Thar coal on time. The projects are part of the China-Pakistan Economic Corridor (CPEC),” he said.

A consortium of 16 Shariah-compliant financial institutions, including banks, development finance institutions (DFIs), investment firms and other eligible ones has agreed, in principle, to lend Rs6 billion at an expected rate of profit of six-months Kibor (Karachi Interbank Offered Rate) plus 250 basis points, it has been learnt. The proposed Sukuk would be issued for a period of five years with Meezan Bank Limited as Shariah adviser and Arif Habib Limited (AHL) as debt arranger from financial institutions.

Hubco, through its wholly owned subsidiary, Hub Power Holdings Limited, will issue the Sukuk.

The company’s total receivables from its power purchasing client - state-owned Central Power Purchasing Agency-Guarantee (CPPA-G), stood at Rs70 billion on September 30, 2020. Capacity payment - the amount which the government pays in case of not utilising its power plants - soared to Rs34 billion, it was learnt.

The company official said they have achieved financial close - having fully arranged to finance - for the two forthcoming new plants on indigenous Thar coal namely Thar Energy Limited (TEL) and Thalnova Power Thar (Private) Limited. “Thar Energy is set to begin commercial operations by the end of December 2021 and Thalnova by end of March 2022,” he added.

Responding to a question that power demand has remained stagnant for many years and the new plants would only add up to the surplus production capacity and increase Hubco receivables; he said the plants may replace the one producing expensive power in the system at present, as the government is determined to take cheaper electricity in the system. “Coal-fired plants produce comparatively cheaper power,” he highlighted.

“Besides, we foresee growth in economic activities going forward. The economic growth would automatically increase demand for power in the system,” he stated. Hubco is having installed capacity of 2,950 megawatts at present, including on furnace oil which remains one of the expensive sources of power production.

Pakistan is having a total installed capacity of over 35,000 megawatts with baseload (minimum utilisation of electricity throughout 24-hours a day nationwide) at 7,000 megawatts for the past five years; 2015-20 while average demand stood at around 12,000 megawatts, it was learnt.

The Hubco official expressed high hope for receiving the overdue payments as soon as the government is working with IPPs on the issue. Earlier, the government has signed a memorandum of understanding (MoU) with IPPs to bring down the price of power in the country. IPPs have agreed to do so on the condition of receiving their overdue.

Now a government team - having included financial and legal experts - under the chairmanship of Adviser to the Prime Minister on Finance Dr Abdul Hafeez Shaikh, has recently started negotiations with IPPs to transform MoUs into a legal agreement. The MoUs signed a couple of months ago were having a lifespan of six months.

Published in The Express Tribune, October 20^th, 2020.

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