The Pakistan Credit Rating Agency Limited
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Madiha Sohail

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PACRA Assigns Initial Rating to K-Electric | PPSTS-6 | PKR 5bln | Apr-22

Rating Type Debt Instrument
(31-Aug-22 )
Action Initial
Long Term AA
Short Term A1+
Outlook Stable
Rating Watch -

The ratings incorporate the strategic importance of K-Electric Limited, (“The Company” or “K-Electric”) being a vertically integrated power utility, responsible for the generation, transmission, and distribution of electricity in Karachi and adjoining areas of Sindh and Balochistan. Support has been drawn from the sustained rather improved performance metrics of the Company, owing to growing demand for electricity and continuous improvement across various operational metrics including reduction in T&D losses and better recovery ratio. The financial risk profile and profitability indicators showed improvement in FY21 (gross profit increased by 35% as compared to last year) driven by these operational improvements. However, in 3QFY22 a decline in net profit of the Company was observed on back of negative adjustment in Mid-term review by Nepra, severe devaluation of Pak Rupee, and increase in effective rate of borrowing. Working Capital also remains a challenge because of the delayed payments from the government resulted in enhanced borrowings ultimately curtailing the profitability because of increased finance cost. To steer from this turbulent situation the Company is in a continuous process to add to its asset base: expansion was noted in plants, distribution and transmission. The Company is pursuing its 900 MW RLNG project on fast-track basis, of which 1st unit of 450 MW has been installed and will be commissioned soon, the generation capacity of company will increase and being efficient plant electricity will be produced at lower rate having positive impact on working capital of the Company. And the management is confident to close the bottom line on the positive note. Further, the Company is also engaged with GoP for direct release of net TDS to ease working capital requirements considering recent increase in fuel prices, which the management is hopeful to receive.
The expected increase in consumer tariff, generation fleet efficiency and additional power purchase from GoP, are imperative for the ratings, going forward. At the same time, upholding business and financial metrics is of utmost importance.

About the Entity
K-Electric, a vertically-integrated power utility, has been in operations for more than a century. Total installed capacity of K-Electric is 2,267MW, having an arrangement with National Grids for 1,400 MW. At end-jun21, KES Power Limited (KESP) held 66.4% share in K-Electric, while Government of Pakistan owned 24.4%. 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
K-Electric issued a privately placed, short term, unsecured sukuk ("PPSTS-6) of PKR 5,000mln on 27-Apr-22, to finance the company’s working capital requirements. The tenor of PPSTS-6 is up to 6 months and carries a profit rate of 6 months KIBOR+70bps. Profit will be realized at the time of maturity.

The primary function of PACRA is to evaluate the capacity and willingness of an entity to honor its obligations. Our ratings reflect an independent, professional and impartial assessment of the risks associated with a particular instrument or an entity. PACRA's comprehensive offerings include instrument and entity credit ratings, insurer financial strength ratings, fund ratings, asset manager ratings and real estate gradings. PACRA opinion is not a recommendation to purchase, sell or hold a security, in as much as it does not comment on the security's market price or suitability for a particular investor.