Karachi, December 30, 2015: JCR-VIS Credit Rating Company Limited has reaffirmed the entity ratings of K-Electric Limited (KE) at ‘AA/A-1’ (Double A/A-One). JCR-VIS has also reaffirmed the rating assigned to outstanding Sukuk 2 (Rs. 3.75b) & Sukuk 3 (Rs. 1.5b) at ‘AA’ (Double A) while rating of Sukuk 4 (Rs. 22b) has also been reaffirmed at ‘AA+’ (Double A Plus). Outlook on the assigned ratings is ‘Stable’. The previous rating action was announced on December 1, 2014.
The assigned ratings predicate the strategic importance of KE as a vertically integrated utility having exclusive rights to distribute electricity in the largest metropolitan city of Pakistan. Ratings also incorporate enhanced financial risk profile of the company as evident from improving profitability and cash flows in relation to outstanding obligations while business risk profile draws support from continuous improvement across various operational metrics.
Further improvement in various operational metrics is expected in the ongoing year. Fleet efficiency is expected to improve in the ongoing year with the completion of Korangi Combined Cycle Power Plant in May’2015 and conversion of two additional open cycle power plants to combined cycle power plants in the ongoing year. Moreover, Transmission & Distribution (T&D) losses are projected to continue their downward trajectory. Management has taken a number of initiatives in order to bridge demand supply gap and cater to increasing electricity demand of the city through up-gradation of existing power plants, establishment of new power plants and agreements for purchase of power from IPPs. Transmission infrastructure is also being upgraded through an extensive TP-1000 project which will increase transmission capacity by 33%.
Profit before tax has depicted healthy growth during FY15. Going forward, profitability of the company is expected to continue to grow on the back of reduction in T&D losses and enhanced efficiency of the generation portfolio vis-à-vis NEPRA benchmarks and lower finance cost. Given the improved profitability and higher recovery ratio, cash flow from operations has remained healthy. Leverage indicators have trended downwards on account of increase in equity due to retained profits. Sizeable capex is planned to be incurred over the next 3 years (FY16-FY18); most significant portion of the capex pertains to funding the TP-1000 project. Major portion of the funding will be raised through debt. In this regard, KE is in the process of signing $250m financing agreement with OPIC and has already signed Export Credit Agency (ECA) backed financing facilities supported by German (ECA) Euler Hermes for Euro 46.5m and Chinese ECA Sinosure for $91.5m. This is the first Sinosure guaranteed financing for private sector entity in Pakistan without sovereign guarantee.
Key risk factors include sizeable and increasing receivables from public sector entities (PSE); although recovery ratio from PSE has shown a sizeable jump due to netting of receivables from public sector entities against electricity duty payable to Government of Sindh. KE is in the process of negotiating a long-term gas supply arrangement with Sui Southern Gas Company (SSGC) which is considered essential to ensure continuity of gas supply and is important for maintaining/enhancing efficiency of generation portfolio. However, KE has extended gas supply arrangement with SSGC for one year through which SSGC is incentivized to ensure a committed gas supply against payment of arrears. As per management, the arrangement is effectively catering to the gas supply needs of the company. Finalization of power purchase agreement for provision of 650MW from National Transmission and Despatch Company (NTDC), tariff approval for coal conversion and resolution of other outstanding legal matters is also considered important. As per management, discussion with GoP on various issues, including renewal of 650MW agreement with NTDC, are going in the right direction and expected to be finalized soon.
The assigned ratings to Sukuk issued by KE incorporate adequate debt servicing capacity and structure of the Sukuk. Sukuk 4 issued by KE has been assigned a higher rating than the entity as repayment of Sukuk is linked to specific receivables from 495 identified industrial customers, which have an extended history of timely payments with the Company and have priority of electricity supply over other consumers. Moreover, rating of Sukuk 4 are supported by additional cushion whereby a cash collection mechanism will be triggered if overall entity level debt service coverage falls below a pre-defined threshold.
For further information on this rating announcement, please contact the undersigned (Ext: 516) or Mr. Javed Callea (Ext: 501) at 92-21-35311861-70 or fax to 92-21-35311873.
Jamal Abbas Zaidi
Applicable Rating Criteria: Industrial Corporate (Oct 2003)
Rating The Issue (September 2014)
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