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IPPs agreement revision/termination, Payouts to be impacted

IPPS

KARACHI, October 10 2024: The Government of Pakistan plans to agree with five power producers to terminate their Power Purchase Agreement (PPA) prematurely. This includes two listed names, i.e., the base power plant for Hub Power (HUBC) and Lalpir Power Limited (LPL), one indirect listed name, Roush Power (through Altern Energy), and two unlisted players, Saba Power and Atlas Power.

Based on the news reports, 4 of the above are set to sign an agreement with the Governments, while 1 (HUBC) is expected to sign it soon.

The objective behind the early termination of these plants is to avoid any further capacity payments to the producers, thus taking one step ahead out of many to reduce power costs in the country. This step may result in the benefit of Rs0.6/Kwh, as per news.

The few other steps which the government may take or is already in talks with relevant quarters are conversion of imported coal power plants to local coal, reprofiling of CPEC-related IPPs debt from existing tenor of 10 years to 15 years, reduction in equity return component of IPPs on 2002 policy, wind power plants and government-owned power plants, and (4) conversion of agreements from take or pay agreements to take and pay, amongst others.

Amidst fear of return revision and premature termination-related news flows, HUBC share price has felled 23% in last 13 sessions since Sep 18, 2024. While other IPPs like LPL have lost 26%, Nishat Chunian Power (NCPL) has lost 13%, and Nishat Power (NPL) has lost 17% in the last 13 sessions.

Besides terminating PPAs with these 5 IPPs, some news reports are suggesting the conversion of 18 IPPs with a combined capacity of 4,267 MW to take and pay agreements from existing take or pay agreements. In these 18 IPPs, the listed names are Pakgen Power (PKGP), Kohinoor Energy (KOHE), Engro Power Gen Qadirpur (EPQL), Nishat Chunian Power (NCPL) and Nishat Power (NPL). Similarly, two private subsidiaries of HUBC are also included in this namely Laraib Energy, and Narowal Energy.

Hub Power (HUBC): The base power plant, which is being terminated now, contributed Rs19/share or 32% to the total EPS of the company in FY24. With this termination, we believe, earnings for the remaining part of the PPA, i.e. FY25, FY26 and 9MFY27 will remain absent for the base plant. Assuming 100% recovery of these cashflows (in the best case), the present value of these cashflows would be Rs35-37/share. HUBC’s share price due to these fears has fallen by Rs34/share from Rs146 on Sep 19, 2024, to Rs112 on Oct 08, 2024. From the recent peak of Rs166.69 on Jul 03, 2024, HUBC’s share price has fallen by 29% or Rs46/share (adjusted for Rs8.5 dividend).

With this termination, companies are expected to receive the previous backlog of their principal amount receivables within 90-120 days as per our channel checks. HUBC has receivables of Rs53bn from the base plant based on the numbers quoted by the management in the analyst briefing (while in unconsolidated accounts receivables balance is Rs63bn). Assuming Interest receivables of Rs20-25bn, taking the hint from an unconsolidated breakup, HUBC will receive payment of Rs30-35bn via this settlement (Rs23-27/share). While, HUBC has an unconsolidated debt of Rs41bn, we believe, any settlement amount received may be paid for retirement of the debt as and when, if received.

Furthermore, there are also news reports suggesting conversion of take or pay agreements for Narowal (100% owned subsidiary of HUBC) and Laraib (75% owned) contributing 7% and 12% to HUBC’s earnings, respectively. We believe, in case of Narowal, this may happen while in case of Laraib there will limited impact on Laraib as it’s a hydel project and produces electricity at zero fuel cost. Assuming Narowal’s requirement …

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