KAPCO - PPA revision important

Kot Addu Power Company Limited (PSX: KAPCO) announced its financial performance for the first nine months of FY20 recently, and the independent power producer’s earnings soared by 78 percent year-on-year.

Though KAPCO’s revenues grew by 3 percent year-on-year, much of the support came from 3QFY20 where sales increased by 11 percent year-on-year, versus negative revenue growth in 1QFY20 and flat growth in 1HFY20. Increase in 3QFY20 revenues primarily due to higher indexation factor due to currency depreciation in the latest quarter.

Boost to the bottomline growth came from higher gross profits and over 8 percentage point improvement in gross margins in 9MFY20 due to weak furnace oil prices lower dispatch of electricity by the IPP that lowered the costs. Growth in other income was the second factor for earnings increase for KAPCO. 9MFY20 witnessed an increase of 59 percent year-on-year, while 3QFY20 posted an increase of 34 percent year-on-year in other income due to higher interest rate environment.

Despite the sizable growth in KAPCO’s earnings, headwinds for IPPs have increased manifolds recently. Besides lower electricity sales amid furnace oil curtailment, rising receivables, the IPPS have come under fire in the recently published IPP report for exorbitant returns earned. The challenge for KAPCO is that its PPA expiration nearing. The IPP’s PPA is expiring in FY21, which means that the long term prospects of the company now depend on the revision of the power purchase agreement. The authorities are discussing force majeure on LNG and IPPs as per contracts due to COVID-19 primarily to delay or suspend capacity payments. In such a case, PPA revision for KAPCO is consequential. Also, this could halt dividend payments by the IPPs. In its recently announced financial performance, KAPCO did not announce any dividend, which usually does not happen as KAPCO is regular in paying dividends than its counterparts.