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Second tranche of energy Sukuk: problem may linger on

Reportedly the Government of Pakistan (GoP) is getting ready to issue ‘Energy Sukuk II’ amounting to Rs200 billion before end May 2019. It is anticipated that around 30 percent of the amount will be to be routed towards independent power producers (IPPs), implying 40 percent settlement of cumulative IPPs’ receivables by June 2019. According to the details for Kot Add Power Company (KAPCO), this may help in resuming payouts in 4QFY19, as payable to Pakistan State Oil Company (PSO) has already halved to Rs24 billion at end March 2019. Deleveraging does not seem to be a priority this time, as opposed to FY13 settlement (75 percent of cash injection was used to retire short term borrowing). For Hub Power Company (HUBC), the total of payable and short term borrowings is 35 percent higher than that of KAPCO. While HUBC may receive an equal amount of cash injection that will leaves little room for cash payouts. Nonetheless, HUBC remains top pick of the brokerage houses, courtesy stream of upcoming US dollar hedged power projects. Amongst IPPs sponsored by Nishat Group, analysts expect both NPL and NCPL to receive Rs3.0 billion. Analysts prefer NPL being lower leveraged as compared to NCPL, enjoying higher payout prospects.

According to a report by AKD Securities, the Energy Sukuk II amounting to Rs200 billion is expected to be issued by end of May 2019 as part of GoP’s strategy to bring down the circular debt currently amounting to Rs606 billion to Rs250 billion by end December 2019. GoP’s target level of circular debt imply a third tranche of Rs150 billion in 2HCY19. The first tranche of circular debt clearance entailed 20 percent of Rs200 billion of cash injection to IPPs. HUBC and KAPCO mostly used the settlement amount to retire payables to PSO. Nishat Group IPPs utilized approximately half of the cash received to retire short term borrowing and paying dividends after a dry spell since FY16 and retaining the balance amount.

As opposed to the first tranche of clearance, analysts expect a higher amount 30 percent of the upcoming settlement or up to Rs65 billion to be paid to IPPs, implying up to 40 percent of cumulative IPPs’ receivables settlement by end June 2019. Inefficient, furnace oil based IPPs (Lalpir and Pakgen Power) are expected to remain on the back burner amidst circular debt settlement exercise. While, HUBC and KAPCO mostly focused on retiring their outstanding payable amount from the first tranche of settlement, the IPPs will have more room to play with the cash inflow this time around. Lower emphasis on deleveraging as compared to FY13 (structural difference in circular debt settlement), could be an upside risk to sensitivity analysis and result in resumption of payout by KAPCO.

The brokerage house expects Rs30 billion to be routed towards KAPCO in the second tranche of energy sukuk as opposed to Rs22 billion in March 2019, taking total receivable settlement to 40 percent. The outstanding payables to PSO have already halved to Rs24 billion as compared to December 2018 levels. KAPCO paid out Rs1.5/share in 3QFY19, while the payout in 4QFY19 may further improve, despite retiring payables and deleveraging. However, even better than expected payout would be a brief distraction from the impending PPA expiry risks, which will likely keep a cap on KAPCO’s price performance.

 

For HUBC, the outstanding payable amount and short term borrowings are 35 percent higher than that of KAPCO, while it may receive a similar amount of cash injection. HUBC is likely to divert the settlement amount towards retiring payable amount, leaving no room for payouts. However, a stream of US dollar hedged power projects and consequent 28 percent earnings CAGR over FY18-22 makes HUBC preferred pick of brokerage house among the IPPs.

The brokerage house expects 50 percent of the Nishat Group IPPs’ outstanding receivables, approximately Rs7 billion each for NPL and NPCL to be settled. Nishat Group IPPs have already received more than Rs3 billion each that is one-fourth of their receivables. NPL and NCPL paid out Rs1.5 and Rs2.0 per share dividend respectively in 9MFY19. Payouts from Nishat IPPs in 4QFY19 seem likely.

Avoiding illusion

Analysts are of the view that issue of Energy Sukuk allows the Islamic financial institutions to overcome ‘surplus liquidity crisis’, but it would remain non productive. Analysts fear that unless the root cause of circular debt is resolved, it will keep on emerging with regular interval. While some analysts believe that the mother of all evils is ‘power pilferage’, others are of the consensus that rising electricity tariffs offer the biggest incentive for power pilferage.

It is apprehended that there will be further increase in gas and electricity tariffs in the aftermath of signing of a bailout package with the International Monetary Fund (IMF). Analysts are of the consensus that increase in energy cost is not a good omen for the industrial consumers as it would render them uncompetitive in the global markets.

They also believe that the depreciation of rupee and appreciation in crude oil price is a double-edged sword for energy deficient Pakistan. They demand the GoP to revisit its Petroleum Policy to facilitate fresh investment in Exploration & Production sector. The issues pertaining to gas marketing companies, particularly massive pilferages, must be dealt with on top priority. Hike in gas tariff for increasing income of gas distribution companies without biding them to contain pilferages tantamount to fleecing consumers.

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