The Kot Addu Power Company was built by the Pakistan Water and Power Development Authority in District Muzaffargarh, Punjab, 90 kilometres north west of Multan on the left bank of the River Indus.

The company has 15 generating units (multi fuel fired power plant — gas, furnace oil and diesel) and a nameplate capacity of 1,600 megawatts.

Kot Addu Power Company (Kapco) sells the electricity it produces to a single customer — Wapda — under a Power Purchase Agreement (PPA). Since the current PPA is valid up to 2021, many energy analysts wonder what would happen after the expiry of the period of agreement.

The progress on construction had slowed down after the government clamped a ban on fresh investments in power generation based on imported fuel

When this query was put to the company’s Chief Financial Officer (CFO), Mr M. Mohtashim Aftab last Wednesday, he told this writer that the government will determine the tariff following the PPA expiry. But he thought that it would most probably be re-negotiated with the National Electric Power Regulatory Authority (Nepra) and Central Power Purchasing Agency (CPPA-G).

Kapco is in the process of setting up a 660MW coal-based power project. Mr Aftab said the site for the project was shifted to Muzaffargarh, from earlier plans to set up the plant in Sheikhupura.

He said that the progress on construction had slowed down after the government clamped a ban on fresh investments in power generation based on imported fuel.

But the company CFO assured that there were no ‘cost over-runs’ due to the possible delay in the project. “On the contrary, there is likely to be some saving over the original cost estimates of $1 billion as the company was able to acquire an Engineering, Procurement and Construction (EPC) contract at competitive prices”, he said.

The management appeared upbeat over the company’s operational and financial performance.

In the directors’ report appended to the accounts for the nine-months ended March 31, the Chief Executive of Kapco, Mr Aftab Mahmood Butt, observed that during the third quarter (Jan-Mar 2017), the power plant generated 1,927.7 gigawatt hours of electricity (year to date generation level at 4,802GWh) at a load factor of 66.7pc (year to date load factor being 54.5pc) and with an overall commercial availability of 97.1pc (year to date overall availability at 96pc).

Circular debt is a constant headache for the entire energy chain and Kapco is no exception.

The company CEO complained: “The ‘off-taker’ continues to remain in default of its payment obligations. On March 31, the overdue receivables from the ‘off-taker’ were Rs72.4bn”. He asserted that the company was continuing to pursue the ‘off-taker’ and concerned ministries in the government for resolution of the matter.

The Kapco CEO also stated in the directors’ report that the ‘off-taker’ had raised liquidated damages invoices for the company’s failure to dispatch due to fuel oil shortage (as it raises with other Independent Power Plants) consequently caused by the off-taker’s payment defaults.

The accumulated amount of liquidated damages invoiced to the company amount to Rs27.9bn for the period 2008-09 to 2015-16. As with previous invoices, the company has disputed the claims for imposition of liquidated damages in accordance with the provisions of the Power Purchase Agreement.

In April, Kapco unveiled its financial results for nine months financial year 2017 (9MFY17) where in the profit after tax (PAT) clocked in at Rs6.760bn, translating into earnings per share (eps) at Rs7.68.

It represented growth of 9pc over the PAT at Rs6.205bn and eps at Rs7.05 earned in the comparable period of the previous year.

Analyst Mehwish Zafar who follows the company for JS Global said: “We believe the primary reasons for the upsurge in net earnings were: higher efficiency gains due to increased gas based generation and rise in ‘other income’ by 20pc over the same period earlier year (YoY), most likely driven by improved penal mark-up income”.

Analyst Tahir Abbas at Arif Habib Limited noted that the net earnings in the third-quarter financial year 2017 (3QFY17) jumped 40pc over the previous quarter (QoQ). Net sales for the 3QFY17 stood at Rs21.2bn, up 40pc QoQ, which was attributable to higher dispatches of 1,927.7GWh, up 67pc QoQ.

Paid-up capital of Kapco at March 31 stood at Rs8.80bn in 880.25 million outstanding shares.

The company maintained a comfortable cushion of ‘unappropriated profit’ amounting to Rs20.5bn. Total assets of the company stood at Rs113bn.

The Kapco stock is currently trading at the stock market at around Rs76 a share, which values the company at Rs67bn.

From an investors’ point of view, the stream of dividend payouts by the company makes its stock a ‘preferred defensive play’ in the energy sector during uncertain times in the market.

On March 31, two associated companies held a majority of 45.7pc of the company’s equity, followed by 28 banks, development financial institutions and non-banking financial institutions with 26pc shares, and 53,261 individuals with 13.7pc of the aggregate stock.

Published in Dawn, The Business and Finance Weekly, June 12th, 2017