THE Kot Addu power plant was built by the Pakistan Water and Power Development Authority in five phases between 1985 and 1996 in Kot Addu, Muzaffargarh district, Punjab. Kot Addu Power Company’s principal activities are to own, operate and maintain a multi-fuel-fired power station with 15 generating units and a nameplate capacity of 1,600MW.

The company sells electricity produced by it to a single customer — Wapda — under a Power Purchase Agreement. This agreement is for a term of 25 years, which commenced from June 1996.

On completion of the offer for sale by the Privatisation Commission of Pakistan in February 2005, 18pc shares of Kapco passed into the hands of the general public. The company came to be listed on the stock exchanges in April 2005.

There has unmistakably been some volatility in the company’s earnings over the past six years, yet there has been a stream of dividend payouts, with the company disbursing Rs5.41bn in 2013. It is one of the reasons that the Kapco stock is recognised as a ‘preferred defensive play’ in the energy sector in uncertain times at the market. According to its balance sheet at end-March, its total assets stood at Rs89bn.

The power company would be less vulnerable to rising circular debt because of its ability to pass on incremental debt to PSO and to curtail dependence on furnace oil amid higher gas supply

Kapco’s outstanding shares stand at 880.25m. Last Thursday’s closing price of the stock — at Rs63.40 — values the company at Rs56 billion. Kapco’s stock has fluctuated between a high and low of Rs88.34 and Rs56.85 respectively in the one-year period.

According to its annual report for 2013, the biggest chunk of 720m shares — accounting for 82pc of the company’s equity — was held by associated companies: Wapda with 354m shares, followed by National Power (Kot Addu) Limited with 317m shares and Kapco Employees Empowerment Trust with 48m shares. The general public holds 57m shares or 6.4pc of the paid-up capital.

In the last reported results for the nine months ended March, Kapco posted a profit-after-tax of Rs5.21bn, translating into earnings per share of Rs5.92, down from Rs5.65bn (eps of Rs6.42) in the corresponding period of the previous year.

“The company’s sole customer [Wapda] remains in payment default to the company,” its directors told shareholders, adding that on March 31, the overdue amount from Wapda stood at a staggering Rs52.8bn. The company was said to be pursuing Wapda and the concerned ministries for resolution of the matter.

“Kapco is currently conducting a feasibility study for setting up a 660MW coal-based power project in Sheikhapura, Punjab. The project’s expected return on equity is 27pc, and it has a decent payback period of 3.7 years,” says investment analyst Naveed Tehsin at JS Global.

The analyst, however, cautions that it is “too early to take into account the project’s impact on Kapco’s profitability, as the final decision to build the power project has yet to be taken. Uncertainty has been created in the minds of onlookers due to their earlier experience when Kapco shelved its expansion plan for its current facility a few years back due to liquidity constraints amid the circular debt issue.

Tahir Abbas, an analyst at Arif Habib Limited, concurs, adding that the feasibility does not assure that the company will finally take up the project. “The venture will need capital injection of around Rs24bn to Rs27bn, depending upon whether capital will be raised through foreign or local financiers respectively,” estimates Tahir.

He also observes that unlike new independent power producers that are governed under the Power Policy 2002, Kapco and Hub Power Company (Hubco) are in a better position in terms of managing their working capital and dividend payout requirements. “Both these IPPs can delay their payments to their respective fuel supplier until Wapda clears off their dues.”

Muhammad Saad Ali, an analyst at KASB Securities, argues that the power company would be less vulnerable to rising circular debt because of two factors: its ability to pass on incremental debt to PSO and to curtail dependence on furnace oil amid higher gas supply. “Also, Kapco is the only listed independent power plant which will benefit from increased gas supply to the power sector,” the analyst said.

Yet, for all its shield against headwinds, Kapco is not devoid from ‘risk factors’ that include a sustained appreciation of the rupee against the dollar, which could hurt its earnings as the tariff is dollar-denominated. Another risk is the burgeoning circular debt, which could bruise earnings due to payment of hefty penal charges and gas outages. Some energy sector analysts caution that these factors could force the company to reduce its capacity utilisation.

Published in Dawn, Economic & Business, July 28th, 2014