Pakistan Credit Rating Agency Limited upgrades entity ratings of K-Electric

Lahore, June 15, 2016 (PPI-OT):The Pakistan Credit Rating Agency Limited (PACRA) has upgraded the long-term and short-term entity ratings of KE to ‘AA’ (Double A) [previous: AA-], and ‘A1+’ (A One Plus) [previous: A1], respectively. These ratings denote a very low expectation of credit risk emanating from a very strong capacity for timely payment of financial commitments.

The ratings reflect continuous improvement in KE’s profile emanating from healthy operational performance and sound profitability. Key contributors are i) enhanced generation efficiency, and ii) consistent reduction in T and D losses, which in turn, has brought down the delta between actual and regulatory T and D benchmark. KE’s tariff structure is designed to pass on these gains to the company’s profitability, which maintained rising trend. Financial risk profile has resultantly improved. Furthermore, the ensuing benefit from off-late conversion of a sizeable portion of existing borrowings with a long-term Sukuk bond at lower rate has strengthened the coverages.

The company has extended working capital needs mainly emanating from sizeable receivables that is managed through a combination of payables and short term borrowing. Key challenges include negotiating favourable multi-year tariff (current expiring in Jun16) and restoration of Power Purchase Agreement (PPA) signed with NTDC for supply of 650MW (expired since Jan15) – probability of discontinuation is considered remote. Meanwhile, the company is pursuing number of generation projects. This is likely to cater the demand growth and to gradually reduce its dependence on purchase of electricity from NTDC. The ratings draw comfort from (i) KE’s strategic significance as the sole power supplier of Pakistan’s industrial and financial hub – Karachi, and (ii) strong sponsors – Abraaj Capital and GoP.

The ratings are dependent on KE’s ability to sustain its operational performance including recovery ratio. Timely materialization of (i) planned initiatives for efficiency improvements, (ii) renewal of contract with NTDC for purchase of 650MW or arranging an amicable substitute, and (iii) favourable determination of multiyear tariff would be important.

For more information, contact:
Hammad Rashid
Analyst
The Pakistan Credit Rating Agency Limited (PACRA)
Awami Complex, FB1, Usman Block New Garden Town,
Lahore – Pakistan
Tel: +9242 586 9504 -6
Fax: +9242 583 0425
Email: hammad.rashid@pacra.com
Web: www.pacra.com