Press Release

JCR-VIS Upgrades Ratings of K-Electric Limited

Karachi, December 1, 2014: JCR-VIS Credit Rating Company Limited has upgraded the entity ratings of K-Electric Limited (KE) from ‘A+/A-2’ (Single A Plus/A-Two) to ‘AA/A-1’ (Double A /A-One). JCR-VIS has also upgraded the ratings assigned to outstanding Sukuk 1, 2 & 3 from ‘A+’ (Single A Plus) to ‘AA’ (Double A). Outlook on the assigned ratings is ‘Stable’. The previous rating action was announced on January 2, 2014.

The ratings assigned to KE are underpinned by the strategic importance of the company as a vertically integrated utility having exclusive rights to distribute electricity in the largest metropolitan city of Pakistan. The upgrade takes into account the strong business risk profile of KE as evident from continuous improvement across various operational metrics.

The company has achieved notable improvement in fleet efficiency in the last few years. Further improvement in this area is expected in view of the on-going conversion of three open cycle power plants to combined cycle power plants. Moreover, major capacity enhancement projects such as development of 660 MWs coal fired project and various other small scale initiatives, are expected to add to the company’s capacity, including the utilization of alternate energy sources, and look promising for the company’s projected generation profile, in the backdrop of the demand-supply gap.

Positive trend in Transmission & Distribution (T&D) losses along with management’s projections for continuity of this trend have also been factored into the assigned ratings. Financial risk profile of the company has also improved as reflected by declining leverage indicators and improved cash flow coverage. Given the anticipated improvement in cash flows, debt servicing coverage is expected to remain strong over the foreseeable horizon, under realistic stress test scenarios. Moreover, the recent dip in international oil prices is expected to reduce the company’s working capital requirement and have a positive impact on profitability.

Key risk factors primarily stem from developments in the external environment and the company’s relationship with third parties, including regulatory authority/suppliers/consumers. The provision of 650 MWs from Water and Power Development Authority (WAPDA), the Power Purchase Agreement (PPA) for which is due to expire in January 2015, is a key component of the overall supply by KE. The chances of non-renewal of PPA with NTDC are considered remote, given the strategic importance of Karachi. External relations with sole gas supplier, Sui Southern Gas Company Limited (SSGC), have been eased with agreement of a Payment Plan, whereby SSGC has committed to ensure a dedicated gas supply to KE throughout the year. The plan also covers clearing of historical dues of SSGC, though there continues to be uncertainty regarding the total amount payable; timely resolution of the same, in addition to other outstanding legal matters is considered important.

For further information on this rating announcement, please contact Ms. Sobia Maqbool, CFA (Ext: 604) or Mr. Javed Callea (Ext: 501) at 92-21-35311861-70 or fax to 92-21-35311873.

Jamal Abbas Zaidi
Deputy CEO

Applicable Rating Criteria: Industrial Corporate (Oct 2003)
Rating The Issue (September 2014)

Information herein was obtained from sources believed to be accurate and reliable; however, VIS Credit Rating Company Limited VIS does not guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information.VIS, the analysts involved in the rating process and members of its rating committee do not have any conflict of interest relating to the rating(s)/ranking(s) mentioned in this report.VIS is not an NRSRO and its credit ratings are not NRSRO credit ratings.VIS is paid a fee for most rating assignments. This rating/ranking is an opinion and is not a recommendation to buy or sell any securities. Copyright 2014 VIS Credit Rating Company Limited. All rights reserved. Contents may be used by news media with credit to VIS.

JCR-VIS Credit Rating Company Limited