PACRA Issues Initial Rating to K-Electric Limited’s New Sukuk Amid Financial Challenges

Karachi, K-Electric Limited (KE), the key electricity provider in Karachi and its surrounding regions, has been assigned an initial rating by The Pakistan Credit Rating Agency Limited (PACRA) for its newly issued financial instrument, PPSTS-19. The rating reflects the company's current financial state, impacted by macroeconomic challenges and operational factors.

According to The Pakistan Credit Rating Agency Limited, KE's strategic role as a vertically integrated power utility in generating, transmitting, and distributing electricity is crucial for the region. However, the company reported a significant net loss of PKR 30.89 billion in FY23, contrasting with a profit of PKR 8.5 billion in FY22. This downturn is largely attributed to macroeconomic factors, including reduced electricity distribution due to the slowing economy, rising fuel prices, and substantial exchange losses due to the Pakistani Rupee's devaluation. Additionally, increased debt servicing costs caused by higher policy rates have strained the company's finances.

KE operates under a regulated tariff system, which currently does not adjust for changes in electricity distribution or policy rates. Delayed government payments have resulted in increased borrowings, impacting the company's profitability. Consequently, KE's finance cost coverage and debt coverage ratios have significantly deteriorated.

The company's leveraging has risen to 54.8%, up from 53% in FY22, and is expected to increase further due to an investment plan for improving transmission and distribution segments. However, PACRA notes KE's provision for timely repayment of long-term borrowings through funds earmarked in Master Collection Accounts (MCA). Despite these challenges, KE has shown sustained improvement in operational metrics, such as reducing transmission and distribution losses, although there is a need for better recovery ratios.

KE has also achieved the synchronization of its 900MW RLNG-fired power project (BQPS-III), with both units now successfully commissioned. Looking ahead, KE has filed separate tariffs for its various business segments to align better with regulatory frameworks and sector developments from FY24 to FY30.

About K-Electric: K-Electric has over a century of history and an installed capacity of 2,817MW, supplemented by arrangements with National Grids and IPPs for an additional 1,650+ MW. KES Power Limited owns a 66.4% share in KE, with the Government of Pakistan holding 24.4%. The company's CEO, Mr. Moonis Alvi, leads an experienced team and has been with KE since 2008.

About the Instrument: KE issued the PPSTS-19 sukuk on August 28, 2023, amounting to PKR 2,348 million to meet working capital requirements. This sukuk, with a six-month tenure and a profit rate of up to 6MK+45bps, partially replaces the redeemed PPSTS-14.

Source: The Pakistan Credit Rating Agency Limited (PACRA)