PACRA Assigns Preliminary Ratings to K-Electric Limited | Islamic Commercial Paper upto PKR 10bln

K-Electric has lately published the annual report for the year ended 30th June, 2017. The company’s net profit took dip during FY17 as compared to last year owing to significant reduction in tariff level along with the change in tariff structure. The operational parameters and the related data reflect improved performance going forward. The number of consumers have taken a growth of ~10% during FY19 as compared to FY18. The recovery ratio of the company, which reflect, amount received against amount billed, has taken almost percentage point improvement during FY19. Hence, the profitability and cashflow position of the company are expected to take a positive impact. The challenge faced by the industry is prevailing circular debt. As of May, 2019 the Company’s gross receivables from various Federal and Provincial public sector entities stand at PKR 177bln and are nearly two times the Company’s payables which total PKR 99bln. The company has not accrued markup on its payable to government controlled entities. The management view is that the markup on these outstanding liabilities will be payable only when it receives markup on its own outstanding receivable balance on account of tariff differential claims and energy dues of the company’s public sector consumers. This has resulted in an increase in the company’s borrowings. The overall leverage indicators reflect manageable position. The external settlement of the pending issues is important, going forward.
The company is creating different avenues to fund it’s enhanced needs of its working capital, recent leg of which is a recently issued Islamic commercial paper (ICP-A) PKR 8,000mln for a tenor of six months. The company is now issuing another commercial paper (ICP-3) of PKR 10,000mln, which is effectively a replacement of an earlier bond which has just matured. In application to PSX dated May 28th 2019, K-Electric informed that following the withdrawal of case before the Sindh High Court, Ministry of Energy (MoE) has notified long standing MYT on May 22nd, 2019 for the period of seven years applicable from July 1st, 2016 to June 30th, 2023. However, the AGM for approval of accounts for the year ended 30th June, 2018 to be held with SECP's direction.

About the Entity
K-Electric, a vertically-integrated power utility, has been in operations for more than a century. At end-Jun19, KES Power Limited (KESP) held 66.4% share in K-Electric, while Government of Pakistan owned 24.4%. KES Power majority is owned (53.8%) by Abraaj Capital (Private Equity Group) with the balance held by a group of investors (Al Jomaih, Saudi Arabia and NIG, Kuwait). KES Power has entered into a share purchase agreement with Shanghai Electric Power Company Limited (SEP) for sale of up to 66.4% shares of K-Electric against a consideration of US$ 1.77bln. The transaction is in process and will close once customary closing conditions and requisite regulatory approvals are obtained. K-Electric has thirteen member board. Mr. Moonis Alvi, CEO is associated with the company since 2008. He is supported by an experienced team.

About the Instrument
Under the Islamic Commercial Paper program, K-Electric issued two Islamic Commercial papers: ICP1 & ICP2 in August-18 and March-19. After the maturity of the two instruments, K-Electric is in process of issuing the third unsecured Islamic commercial paper of PKR 10,000mln (inclusive of green shoe option of PKR 3,000mln) to finance the ongoing working capital requirements.