Entity Ratings to Kot Addu Power Company reaffirmed

Karachi: JCR-VIS Credit Rating Company Limited (JCR-VIS) has reaffirmed medium to long-term entity rating of Kot Addu Power Company Limited (KAPCO) at ‘AA+’ (Double A Plus) and short-term rating at ‘A-1+’ (A One Plus). The outlook on the medium to long-term rating is ‘Stable’.

KAPCO is the second largest Independent Power Producer (IPP) in the country in terms of power generated and has a consistent history regarding plant availability and thermal efficiency. The company has a competent in-house Operations and Maintenance (O and M) team trained under the guidance of original equipment manufacturers.

However, operations risk is relatively higher for KAPCO as compared to other IPPs since it cannot charge liquidated damages on non-performance in the absence of an O and M contractor. The ratings also draw strength from sponsorship of KAPCO jointly held by Government of Pakistan (GoP) through WAPDA and International Power Plc, a company with extensive global power sector experience.

The country’s power sector continues to be adversely impacted by the circular debt crisis with significant losses under various heads including line losses, non-recoveries and differential in cost of generation and tariff. Delays in release of timely payments and inadequate funds to resolve the issue has created liquidity constraints in the power sector while forcing companies to leverage their position.

However, comfort can be drawn from the Guarantee issued by the GoP, which ensures payment to KAPCO against receivables from WAPDA. Also given the growing importance of IPPs to the power sector in the absence of any major developments in Hydel and coal generation, GoP’s support to a major source of power generation, like KAPCO, is implicit, in an event of a contingency. Guaranteed capacity purchase price payments for KAPCO is also a major rating factor.

Leverage indicators deteriorated in FY11 and in 1H12 on account of increase in borrowings to finance trade receivables from WAPDA. Subsequent to Dec’11, stress on cash flows has eased off with the receipt of Rs. 60b, which includes a circular debt settlement of Rs. 35b from WAPDA. This amount has been utilized to reduce payables to PSO and retire outstanding borrowings. Resultantly leverage indicators have showcased improvement.

For more information, contact:
Mr. Javed Callea
Advisor
JCR-VIS Credit Rating Company Limited
Tel: +9221 35311861 (10 lines) (Ext: 501)
Fax: +9221 35311872-3
E mail: javed.callea@jcrvis.com.pk

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