VIS reaffirms entity ratings of NCPL

November 25, 2024 (MLN): VIS Credit Rating Company Limited (VIS) has reaffirmed the entity ratings of Nishat Chunian Power Limited (NCPL) from ‘A+/A2’, according to the press release.

A medium to long-term rating of 'A+' indicates good credit quality, and protection factors are adequate.

Risk factors may vary with possible changes in the economy. A short-term rating of 'A2' suggests good likelihood of timely repayment of short-term obligations with sound short-term liquidity factors.

Outlook on the assigned ratings remains stable. The previous rating action was announced on September 27, 2023.

Assigned ratings take into account NCPL’s low business risk profile, supported by the execution of a long-term Power Purchase Agreement (PPA) signed in 2007, valid until 2035, and a corresponding license from the Government of Pakistan (GoP).

The Implementation Agreement (IA) with the GoP, facilitated by the Private Power and Infrastructure Board (PPIB), provides further assurance.

The Company has a 25-year and 75-day Power Purchase Agreement (PPA) entailing a ‘take or pay’ provision with a Central Power Purchasing Agency-Guarantee (CPPA-G) with net production levels of 195.72 MWh (megawatt per hour).

The PPA’s “Take or Pay” structure mitigates demand-side risk, ensuring capacity payments and guaranteeing fixed costs, including Return on Equity (ROE), which was renegotiated to 17% without USD indexation in 2021.

Assigned ratings also consider the company’s financial risk profile. Profitability has shown improvement driven by revenue from energy sales and capacity payments.

Satisfactory liquidity is evident through the retention of cash reserves and maintenance of the current ratio.

The company’s capitalization profile remains conservative with no long-term debt, reflecting complete repayment of plant construction loans.

Short-term debt has been significantly reduced, primarily utilized for working capital requirements.

In addition, credit risk is minimized as receivables from the Central Power Purchasing Agency (CPPA-G) are backed by a GoP guarantee. Consequently, a healthy coverage profile has been sustained.

Going forward, ratings are sensitive to changes in the Company’s cash flow generation, given its dependence on timely payments from CPPA-G amidst circular debt concerns in the energy sector.

The ability to maintain profitability and liquidity profiles will remain crucial.

Any shifts in government policies, regulatory frameworks, or macroeconomic conditions could impact future profitability and leverage indicators.

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