Four IPPs served notice to PEPCO: As per media sources, four IPPs served one month notice to PEPCO for payment of PKR16.5bn in overdue receivables on May 13th, 2011, and failure of PEPCO to clear dues within this period would lead these IPPs to issue final notices for invoking sovereign guarantees. GoP will have to clear PEPCO’s dues within 10 days of invoking sovereign guarantees, nonconformity of which would lead to GoP default. Industry sources revealed that IPPs have not yet invoked sovereign guarantee.
Overdue amount at May 13th lower than Mar 31st levels: Overdue receivables levels on the date of notice (May 13, 2011) were below March 31, 2011 level, which imply that notice to PEPCO is an attempt by IPPs to discipline payment by PEPCO. Although PEPCO made payment of PKR6bn during the notice period, it was likely lower than the sales during the period, resulting in further increase in receivables.
Borrowing capacity of the new IPPs remains a key concern: Receivables of NPL and NCPL can potentially rise to a maximum of PKR10.5bn and PKR11.1bn respectively by Jun-11, without exhausting their threshold level of debt to equity ratio of 80:20. Mar 31st receivables for NPL and NCPL were PKR4.16bn and PKR1.84bn below their respective threshold limits.
GoP default and Plant shutdown remain a distant possibility: The odds of payment by GoP to IPPs are high, as GoP cannot afford to default on sovereign guarantee. For a small amount, shutdown of these IPPs would lead to increase in load shedding or increased utilization of inefficient Gencos which could add PKR1.5bn to monthly generation cost.
Four IPPs served notice to PEPCO
As per media sources, four IPPs served 1 month notice to PEPCO for payment of a cumulative PKR16.5bn in overdue payments on May 13th, 2011. Media sources suggest that during the notice period, PKR6bn was paid to IPPs, while PKR10bn along with one month dispatch is still outstanding. In case of non compliance, IPPs would serve a final notice for invoking sovereign guarantee, after which the government will have to clear Pepco’s dues within 10 days, failing which the GoP would stand as having defaulted on its sovereign guarantee. Industry sources reveal that notice for invoking sovereign guarantee is not yet served to Government and the issue may be resolved prior to final notice.
Overdue amount at May 13th lower than Mar 31st levels
Amongst the listed IPPs, overdue receivables stood at PKR4.38bn for NCPL and PKR5.94bn for NPL on Mar 31, 2011. On the date when the IPPs served notice to PEPCO (May 13), overdue receivables stood at PKR4.1bn for NCPL and PKR4.5bn for NPL, lower than Mar 31st, 2011 levels. This illustrates an important aspect that the current episode of legal notices is not a result of worsening receivables situation, instead it is likely to be an attempt by the IPPs to discipline PEPCO’s payment habits, while protecting their legal positions. While PEPCO indeed made a payment of PKR6bn. After May 13, the payment is likely to have been lower than the estimated sales during the notice period. As a result, receivables of the four IPPs would likely have increased in the past one month. Our discussion with NCPL management suggests that NCPL’s overdue receivables have increased to PKR5.3bn as of yesterday as PKR1.3bn received from Pepco during the period was lower than sales during the period (estimated at PKR2.5bn). The company management also revealed that sovereign guarantee is not yet invoked by the IPPs.
Borrowing capacity of the new IPPs remains a key concern
The IPPs under discussion have been established at a debt to equity ratio of 80:20, which is the maximum limit permissible by SBP. Hence delays in payments from Pepco and resulting need to take short term financing could raise the debt to equity ratio of these entities beyond the maximum threshold. Therefore, beyond this limit, the capacity of the IPPs to borrow and subsequently procure fuel would exhaust. Our estimates suggest that receivables of NPL and NCPL would need to rise beyond PKR10.5bn and PKR11.1bn respectively, in the next two months, in order to exhaust their borrowing capacity and lead to plant shut down. Mar 31st receivables for NPL and NCPL were PKR4.16bn and PKR1.84bn lower than their respective threshold limit.
GoP default and Plant shutdown remain a distant possibility
Government will likely clear the dues of IPPs in the near term as government cannot afford default on sovereign guarantees. Amount required to clear dues of IPPs (PKR10bn) is a small amount in comparison to the recently paid PKR120bn to the power sector in May-11. Shut down of these IPPs would increase load shedding and have large public fallout. As a result, government will have to increase Gencos generation on HSFO which shall be at least 24% or PKR2.9/unit more costly than the four IPPs, leading to monthly incremental cost of PKR1.5bn for the power purchaser.
Economic & Political News
Budgetary borrowing up by 65 percent
The government borrowing for budgetary support from financial institutions has increased by 65% to PKR716.72bn till June 4 of the current fiscal year. The overall borrowing for budgetary support from the central bank increased to PKR220bn from July, 2010 to June 4, 2011 as against PKR198.97bn in the corresponding period of the last financial year, showing an increase of 10.73%. The government borrowing from banking system went up by 94.56% to PKR487.52bn from PKR250bn previously.
30% decline in FDI during July-May
Foreign direct investment (FDI) dropped by 30% during eleven months (July-May) of current fiscal year, mainly due to lack of foreign investors’ interest owing to adverse law and order situation. The State Bank of Pakistan on Tuesday said that FDI stood at USD1.39bn during eleven months of current fiscal year as compared to USD1.98bn of corresponding period of last fiscal year, depicting a decrease of USD590mn.
The research analyst(s) denoted AC on the cover of this report, primarily involved in the preparation of this report, certifies that (1) the views expressed in this report accurately reflect his/her personal views about all of the subject companies/securities and (2) no part of his/her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
The report has been prepared by Elixir Securities Pakistan (Pvt.) Ltd and is for information purpose only. The information and opinions contained herein have been compiled or arrived at based upon information obtained from sources, believed to be reliable and in good faith. Such information has not been independently verified and no guaranty, representation or warranty, expressed or implied is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this document is not, and should not be construed as, an offer, or solicitation of an offer, to buy or sell any securities or other financial instruments.
Research Dissemination Policy
Elixir Securities Pakistan (Pvt.) Ltd. endeavors to make all reasonable efforts to disseminate research to all eligible clients in a timely manner through either physical or electronic distribution such as mail, fax and/or email. Nevertheless, not all clients may receive the material at the same time.
Company Specific Disclosures
Elixir Securities Pakistan (Pvt.) Ltd. may, to the extent permissible by applicable law or regulation, use the above material, conclusions, research or analysis in which they are based before the material is disseminated to their customers. Elixir Securities Pakistan (Pvt.) Ltd., their respective directors, officers, representatives, employees and/or related persons may have a long or short position in any of the securities or other financial instruments mentioned or issuers described herein at any time and may make a purchase and/or sale, or offer to make a purchase and/or sale of any such securities or other financial instruments from time to time in the open market or otherwise. Elixir Securities Pakistan (Pvt.) Ltd. may make markets in securities or other financial instruments described in this publication, in securities of issuers described herein or in securities underlying or related to such securities. Elixir Securities Pakistan (Pvt.) Ltd. may have recently underwritten the securities of an issuer mentioned herein.
Other Important Disclosures
Foreign currency denominated securities is subject to exchange rate fluctuations which could have an adverse effect on their value or price, or the income derived from them. In addition, investors in securities such as ADRs, the values of which are influenced by foreign currencies effectively assume currency risk. Foreign currency denominated securities is subject to exchange rate fluctuations which could have an adverse effect on their value or price, or the income derived from them. In addition, investors in securities such as ADRs, the values of which are influenced by foreign currencies effectively assume currency risk.