Equity Analysis /

Pakistan IPPs: ECC approves payment of first installment to IPPs

  • After much delay, ECC approved the disbursement of PKR90bn as the first installment of overdue receivables to 35 IPPs

  • This will significantly improve liquidity for these IPPs and in turn the overall Energy chain (including fuel suppliers)

  • Among IPPs we prefer HUBC with a TP of PKR125/sh and PSO among fuel suppliers with a TP of PKR300/sh

Yusra Beg
Yusra Beg

Senior Investment Analyst

Intermarket Securities
6 May 2021

After much delay, the ECC yesterday approved the disbursement of PKR90bn as the first installment from outstanding payments (c. PKR450bn) to 35 IPPs (under Power Policy 1994 and pre-1994 PP) and withheld disbursal for 12 IPPs (under PP 2002) presently undergoing NAB investigation. However, the decision is yet to be approved by the Federal Cabinet which will follow the Eid holidays (until 17 May).

Within the listed space, IPPs receiving payments include Hub Power (HUBC), Kot Addu Power (KAPCO), Pakgen Power (PKGP), Lalpir Power (LPL), Rouche Power (a subsidiary of Altern Energy), and Kohinoor Energy (KOHE). Note that the payments will be made according to the receivables outstanding in November 2020. Note that only the Base plant of HUBC (1,292MW; pre-1994 PP) will receive payments at this stage and not Narowal (200MW; 2002 PP).  

According to the agreement, payments to IPPs would be made in two installments. The first installment of 40% will be one-third cash, one-third 5yr Sukuk and one-third 10yr PIB and will be cleared by May 2021. The second installment of the remaining 60% will be disbursed on similar terms six months after the first payment is disbursed (this tranche was originally due to be paid by September 2021).

To recall, the Government inked the agreements with IPPs (on pre-2015 Power Policies) in February 2021 to clear outstanding dues of mostly RFO based IPPs (cumulatively c.PKR450bn) in exchange for reductions in future tariffs (including the ROE of the plant). The agreements followed the MoUs signed in August 2020 – a bid to reduce the contractual liability of future capacity payments by the Government (estimated to be around PKR675bn).

In our view, this arrangement will significantly improve the liquidity for the 35 IPPs and in turn the overall Energy chain (including fuel suppliers). It will potentially lead to special dividends from the aforementioned IPPs – given they have a net positive delta (receivables minus payables). The arrangement is expected to slow annual circular debt build-up to c.PKR275-300bn per annum. IPPs are likely to come back into favor on the PSX, particularly after a lull period ahead of the approval (due to the delays). LPL and PKGP will see a significant rise in dividends (their PPA expires in 2027). Although KAPCO is among the beneficiaries in this scenario, the uncertainty surrounding its PPA extension continues.

In the case of HUBC, we highlight that it already preempted payout increases during 1HFY21 ahead of the settlement (skipped in 3Q due to delays in approval). We expect payouts to resume in 4QFY21 and continue rising thereafter. Nonetheless, it will retain some of the net cash injection for its expansion projects. We reiterate our liking for HUBC with a TP of PKR125/sh.

Among the fuel suppliers, we highlight this development is positive only for Pakistan State Oil (PSO, Buy, TP PKR300/sh) and the gas utilities (SSGC and SNGPL), because PSO is the sole fuel supplier to the 1994 PP plants and HUBC’s Base plant while Attock Petroleum (APL) supplies mostly to 2002 PP plants. Most of the RFO based IPPs (among the 35) will likely settle the payables to PSO; however, how much of the payment will be used to settle outstanding penal charges (for late payments to PSO) is upon the discretion of the IPPs. Nonetheless, PSO is likely to book large penal income (albeit sporadically) in the coming quarters.