Equity Analysis /
Pakistan

Swift decline in FO-based generation; HUBC worst hit

    Intermarket Securities
    24 September 2018
    • Power generation during Aug’18 clocked in at 1,600MW, up 10% yoy. However, the Furnace Oil (FO) based generation declined by 47% yoy to 187MW. The share of FO based generation in total energy mix has halved to 12% from 24% in Aug’17. 
    • HUBC Base plant remained the worst hit, operating at utilization level of just 21% in Aug’18, down 54 ppt yoy. Meanwhile, load factors for LPL and PKGP also declined by approximately 15 ppt yoy. Efficient IPPs – Narowal, NPL and NCPL - managed to operate at utilization levels in the range of 80-90%, similar to last year levels. 
    • Going forward, the government may potentially delay the payments to closed/in-efficient FO based plants. Case in point being LPL and PKGP, which skipped dividends in 1HCY18, vs. paying PKR1.0/sh each in the same period last year. A potential plant shut down may keep HUBC’s price performance muted despite the upcoming 1x660MW in Dec’18.

    FO based generation down 47% yoy

    Power generation during Aug’18 clocked in at 1,600MW, up 10% yoy. However, the Furnace Oil (FO) based generation declined by 47% yoy to 187MW. The share of FO based generation in total energy mix has halved to 12% from 24% in Aug’17. Major decline was predictably witnessed in FO based GENCOs, while inefficient IPPs also bore the brunt of lower FO based generation (refer to the table on right). The share of coal/LNG/hydel based generation in total energy mix now stands at 10/23/32% vs. 3/11/33% in Aug’17. In 2MFY19, FO based generation declined by 54% yoy, while water shortage resulted in hydel based generation to decline by 8% yoy. Meanwhile, coal and LNG based generation increased 3.9x yoy and 2.2x yoy, respectively.

    HUBC majorly affected

    Amongst listed FO based IPPs, HUBC’s Base plant remained the worst hit, operating at utilization level of 21% in Aug’18, significantly lower than the utilization level of 72% in the same period last year. Other inefficient IPPs like LPL and PKGP also witnessed a visible decline of approximately 15 ppt yoy in generation. Meanwhile, the efficient FO based IPPs -  HUBC Narowal, NPL and NCPL - maintained dispatch factors in the range of 80-90% as compared to the same period last year, Narowal being the only one to exhibit 6 ppt yoy increase. 

    Low FO sales are the new normal…

    We highlight that HUBC’s Base plant has operated in the range of 15-30% during Jun-Aug’18 (peak demand season for FO based generation) vs. 60-80% during Jun-Aug’17. Even though KAPCO’s load factor increased to 84% in Aug’18 from 76% in Aug’17, the fuel mix has now completely reversed; FO: Gas ratio is now 30:70 vs. 74:26 in the same period last year, mostly due to KAPCO’s recent GSA of 200mmcfd gas supply (equivalent to KAPCO’s 60% utilization) with SNGPL, effective till CY18 end. Note that, Aug’18 FO sales nosedived 79% yoy to 190k tons – lowest ever monthly sales in last 14yrs (Please refer to our daily published on OMCs). We have recently revised our FO sales estimates, while we await for further clarity before revising HUBC Base plant’s dispatch factor. Also, we highlight that a decline in dispatches may keep the earnings intact; however a potential delay in payments from government to closed/inefficient IPPs may pose a risk to HUBC’s dividends, going forward.

    …while payout from inefficient IPPs may also choke

    LPL and PKGP both skipped dividends in 1HCY18, vs. paying PKR1.0/sh each in the same period last year. LPL/PKGP have corrected 12/6% since result announcement. We believe no payout has been due to both furnace oil price hike and aggravating circular debt, as well as government prioritizing payments to efficient IPPs and/or HUBC and KAPCO which accounted for 40% of PSO’s FO FY17 sales. While HUBC and KAPCO both managed to maintain healthy payout ratios of approximately 75% in FY18, HUBC’s dividends may be at risk going forward. The first 660MW unit of HUBC’s 2x660MW imported coal power project is expected to come online in Dec’18; however, potential shutdown of HUBC’s Base plant, going forward may keep share price performance in check.  

    Risks: (i) Further pile up of circular debt, (ii) Rupee appreciation, (iii) Plant shutdowns.