Karachi, November 25, 2013: JCR-VIS Credit Rating Company Limited has assigned entity ratings of ‘A+/A-2’ (Single A Plus/A-Two) to Karachi Electric Supply Company Limited (KESC). JCR-VIS has also assigned preliminary ratings of ‘A+’ (Single A Plus) to the proposed Sukuk issuance program of Rs. 6b in three tenors, Sukuk-1 (Rs. 0.75b), Sukuk-2 (Rs. 3.75b) & Sukuk-3 (Rs. 1.5b). Outlook on the assigned ratings is ‘Positive’.
The assigned ratings recognize the strategic importance of KESC, a vertically integrated utility company, that has exclusive distribution rights in its service area i.e. Karachi and adjoining areas of interior Sind and Baluchistan. KESC’s strong business risk profile is supported by the enhanced efficiency of generation portfolio, reduction in Transmission & Distribution (T&D) Losses, stable & professional management team and improving financial risk profile. Demonstrated financial support from the sponsors, Abraaj Capital, provides strength to the assessment of overall risk profile of the institution. Conversion of a portion of the total debt extended by International Finance Corporation (IFC) and Asian Development Bank (ADB) into equity also reflects confidence of stakeholders in KESC.
Over the last five years, generation capacity has been enhanced by over a 1,000MWs with over three fourths of the power added through more efficient combined cycle power plants (CCPP). Moreover, three existing open cycle plants are being converted into combined cycle which will result in further efficiency and capacity enhancements. Given the current supply shortage of gas, diversification of fuel mix is also being actively pursued. In this regard, in the first phase, conversion of two units of Bin Qasim Power Station-1 (BQPS-1) to coal is planned. Management believes that the tariff for coal project will be notified by year-end. From there-on, it is projected that up to 2.5 years will be required for completion of the project.
KESC has an efficiency based tariff structure and profitability has depicted marked improvement since the commissioning of BQPS-2. Resultantly, cash flows and debt servicing coverage have also showcased improvement. Timely recovery of net tariff differential claim and dues from public sector entities is important from the perspective of cash flow management. Recent power tariff adjustment has reduced the quantum of receivables from the Government of Pakistan. Despite significant improvements, overall T&D losses continue to be weaker than NEPRA’s threshold level while recovery from certain public sector strategic consumers still remains a concern. A number of initiatives are on the anvil to address T&D losses in the high loss areas and improve recoveries; realization of these targets in line with projections will be closely tracked.
KESC plans to issue Sukuk of Rs. 6b in the on-going year to reduce reliance on short term bank credit. The Sukuk structure is based on Shirkat-ul-Milk. Sukuk is planned to be issued in three tenor buckets with maturities of 13 months, 3 years and 5 years, with bullet repayments. Given the improvement in cash flows, debt servicing coverage is expected to remain adequate.
For further information on this rating announcement, please contact Ms. Sobia Maqbool, CFA (Ext: 506) or Mr. Javed Callea (Ext: 501) at 92-21-35311861-70 or fax to 92-21-35311873.
Jamal Abbas Zaidi
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