NISHAT Chunian Power Ltd is a subsidiary of Nishat (Chunian) Ltd. The company has established a fuel-fired power station with a gross capacity of 200MW. The project, located in Punjab, was commissioned under the Power Policy 2002.

The company has a power purchase agreement with its sole customer, the National Transmission and Dispatch Company Ltd (NTDCL), for 25 years, starting from the date of commencement of operations on July 1, 2010.

Nishat Chunian Power (NCPL) holds Rs27bn in total assets. For the latest nine months ended March 31, 2014 (9MFY14), its turnover stood at Rs20.7bn, yielding a profit-after-tax of Rs2.1bn. Along with the recently declared financial figures, NCPL announced an interim dividend of Rs1.50 per share, taking its total cash payout for 9MFY14 to Rs4.50 per share.

Analysts point out that NCPL has continued to follow a high dividend payout policy; in the last two years, the payout has averaged 60pc. It is perhaps for being in the fold of the strong Nishat group, and its healthy dividend payout policy, that NCPL’s stock trades at around Rs40, which is second only to Hub Power and Kot Addu Power among the 14 power producing units listed on the KSE.

While the accumulation of circular debt remains a concern for Nishat Chunian Power, a liquidity injection of Rs47.5bn by the government during May is thought to have shown the government’s resolve to ensure continuous fuel supplies to power plants

With paid-up shares of Rs385m, the market capitalisation of the company stands at Rs15.4bn. According to its Annual Report 2013, Nishat Chunian Limited — the holding company — commanded 51.07pc of the NCPL stock. It was followed by banks and development finance institutions with 29pc of the equity, and the public stake at around 13pc.

Yahya Saleem, CEO of Nishat Chunian Power, complains that the circular debt still presents a major challenge to companies in the power sector. The NTDCL has persistently failed to meet its obligations to make timely payments. At March 31, 2014, total receivables from NTDCL were Rs9.92bn, out of which Rs4.19bn were overdue.

The company continues to take up the matter of overdue receivables not only with NTDCL but also with the ministry of water and power through the Private Power and Infrastructure Board (PPIB), the CEO says.

Analyst Sharoz Hameed at Global Securities affirms that as the circular debt continued to pile up during the third quarter of this fiscal (3QFY14), the company witnessed further deterioration in its liquidity position, reporting trade receivables at Rs9.92bn, out of which Rs4.19bn were overdue by end-March.

Consequently, the company increased its short-term borrowings to fund its operations. As of March 31, its short-term borrowings stood at Rs5.27bn, rising by Rs1.56bn during 3QFY14, resulting in a quarterly increase of 12pc in finance costs, which amounted to Rs502m.

Optimists, however, see a silver lining. “Since the company earns a net positive spread due to circular debt, the bottom line benefited from the increase in trade debts,” Hameed says. Fahad Irfan, an analyst at Foundation Securities, agrees. “NCPL enjoys a positive interest spread of 200 basis points between the interest payment on delayed payments and its short-term financing costs.”

Hameed commented in his May 28 report that despite higher plant load factor, NCPL’s earnings of Rs2.1bn during 9MFY14 remained flattish “primarily due to lower penal income earned by the company. [But] a gradual increase in trade debts resulted in higher penal income for the company during 3QFY14, inflating earnings for the period”.

Plant utilisation stood at 84.73pc during 9MFY14, against 73.79pc during the same period last year.

Going forward, the Global Securities analyst expects the effect of the rupee’s appreciation to reflect in Nishat Chunian Power’s fourth quarter earnings, as Nepra determines quarterly indexation at the start of every quarter. However, the adverse effect (since the tariff is dollar-based) of the rupee’s appreciation is expected to be partially offset by an increase in penal interest income.

And while accumulation of circular debt remains a concern for the company, a liquidity injection of Rs47.5bn by the government during May is thought to have shown the government’s resolve to ensure continuous fuel supplies to power plants. Hence, generation is likely to remain high during 4QFY14, as FO-based power plants are expected to operate at high utilisation levels to meet the increasing demand of electricity, sector watchers say.

They lament that the country’s energy mix is heavily skewed towards more expensive sources like gas, oil and diesel. Neighbouring countries like India and China generate 69pc and 79pc of their power from coal respectively. By contrast, Pakistan generates less than 0.1pc from this cheaper source of energy.

“A medium-long term strategy for improving the energy mix needs to be chalked out to effectively address the energy problems of the country,” asserted a sector expert.

Published in Dawn, Economic & Business, June 2nd, 2014