Press Release

Ratings of K-Electric Limited

Karachi, October 14, 2019: VIS Credit Rating Company Limited (VIS) has assigned preliminary rating of AA+ (Double A Plus) to K-Electric Limited’s (KE) proposed Rs. 25billion Sukuk. KE’s long-term entity and Sukuk ratings (Rs. 22b Sukuk) have been reaffirmed at AA (Double A) and AA+ (Double A Plus), respectively. The Company’s short-term ratings have been upgraded from A-1 (Single A One) to ‘A-1+’ (Single A-One Plus) given the expected improvement in working capital cycle with the expected increase in consumer end tariff and release of tariff differential claims (TDCs) from GoP post completion of NEPRA verification. Rating assigned to KE’s outstanding Islamic Commercial Paper (ICP-A) has also been upgraded to ‘A-1+’ (A-One Plus). With the notification and finalization of Multi Year Tariff (MYT), Rating Watch- Developing status assigned to the rating has been removed. Outlook on the assigned long-term ratings is ‘Stable’.

The assigned rating recognizes the strategic importance of KE, a vertically integrated power utility company. The exclusivity of distribution rights in its service area i.e. Karachi and adjoining areas of interior Sind and Baluchistan provides protection from direct competition which is a key rating consideration. Business risk profile draws support from growing demand for electricity (units sold have increased at a CAGR of 4.6% over the last 5 years) and continuous improvement across various operational metrics including reduction in transmission & distribution (T&D) and aggregate technical and commercial (AT&C) losses. Overall financial profile is projected to remain adequate.

Given the decline in tariff, EBITDA is expected to be lower vis-à-vis historical levels in the earlier years. However, EBITDA is projected to depict healthy growth over the MYT period on the back of higher units sent out and continuous reduction in T&D losses which is expected to beat NEPRA benchmark in later years. Quantum of improvement in EBITDA and profitability will depend on growth in units sent out, extent of reduction in T&D losses vis-à-vis NEPRA benchmark, amount of write-off claims and upward revision in MYT during mid-term review which becomes due in Dec’2019. Sizeable increase in TDC has impacted working capital management which has resulted in significant jump in short-term borrowings, leverage indicators and finance cost. While remaining within manageable levels, leverage indicators are expected to continue to increase given the significant capital expenditure being incurred and planned over the rating horizon. Debt servicing coverage ratio is expected to decline but remain comfortable over the rating horizon. Liquidity profile remains dependent on achieving projected recovery ratio (RR improved to 93% in FY19 vis-à-vis 91% in FY18), recovery of old outstanding dues (current dues are almost entirely being recovered) and timing & quantum of inflows from TDC.

KE plans to issue a Sukuk amounting to Rs. 25b (inclusive of a green shoe option of Rs. 5b) to finance ongoing capital and operating expenditures of the company. Tenor of the instrument is 7 years (inclusive of a grace period of 2 years). Ratings to the proposed Sukuk draw strength from the structural features of the instrument. Sizeable and growing cash flows (increased at a CAGR of 13.6% over the last 5 years) that will be routed through the new Master Collection Account (MCA) is a key rating strength and provides strong coverage for debt payments planned to be undertaken through the MCA.

KE has received fresh public announcement on 30th September 2019 from Shanghai Electric Power (SEP) of their intention to acquire 66.4% stake in KE. Financial profile and ownership structure of SEP along with expected synergies in various business and operational areas will have positive implications for KE. VIS will track developments in this regard.

For further information on this rating announcement, please contact Mr. Talha Iqbal (Ext: 213) or the undersigned (Ext: 207) 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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