Karachi, January 12, 2023 (PPI-OT):VIS Credit Rating Company Limited (VIS) has revised the entity ratings of Kot Addu Power Company Limited (KAPCO or ‘the Company’) from ‘AA+/A-1+’ (Double A/A-One) to ‘AA/A-1’ (Double A/A-One). The medium to long-term rating of ‘AA’ denotes high credit quality; protection factors are strong. Risk is modest but may vary slightly from time to time because of economic conditions.
The short-term rating of ‘A-1’ denotes high certainty of timely payment; liquidity factors are excellent and supported by good fundamental protection factors. Risk factors are minor. The outlook on the assigned rating has also been revised from ‘Rating Watch – Developing’ to ‘Stable’. The previous rating action was announced on December 10, 2021.
The rating takes into account ownership profile of the Company, with majority shareholding being held by WAPDA. Even though the Company’s Power Purchase Agreement (PPA) with the Government of Pakistan (GoP) has expired in Oct’22, the strategic importance of KAPCO to the national grid is evident from NEPRA’s Indicative Generation Capacity Expansion Plan (IGCEP) 2022-31, wherein the regulator has indicated that KAPCO will remain part of the system till FY26 mainly to cater for system constraints.
The extended PPA has expired in October 2022. As per the IGCEP, the Company will continue to operate till FY25, on account of system constrains of Pakistan’s national grid, with limited capacity utilization. Accordingly, given pending renewal of PPA, demand risk has been incorporated in the assigned rating.
Over the years, KAPCO has entirely repaid its long term debt, and the debt on the books is essentially short term in nature used for financing working capital requirements, particularly because of delayed release of payments from Central Power Purchasing Agency –Guarantee (CPPA-G).
This does not affect KAPCO’s profitability, as the Company also books interest income on these receivables. However, it results in inflating the trade debt and debt utilization of the Company. Credit risk on these receivables is viewed as low, given that these are sovereign guaranteed. The rating also incorporates sizable liquid assets on KAPCO’s balance sheet, as a result of which net debt of the Company is nil, while these liquid assets also generate secondary income for the Company.
The assigned ratings remain dependent on business and financial risk metrics, particularly liquidity ratios, being maintained, and potential plans for liquidity deployment be duly shared with VIS. Furthermore, finalization of PPA with CPPA-G in the short to medium term remains critical from a ratings purview. VIS will continue to monitor the developments in this regard on an ongoing basis.
For more information, contact:
Director Compliance and Rating Analytics,
VIS Credit Rating Company Limited
VIS House, 128/C, 25th Lane off Khayaban-e-Ittehad,
Phase VII, DHA, Karachi, Pakistan
Tel: +92-21-35311861-72
Fax: +92-21-35311873
Email: bilal@jcrvis.com.pk
Website: https://www.vis.com.pk/