May 13, 2024 (MLN): Pakistan’s power generation & distribution industry experienced notable earnings growth in the first quarter of 2024, however, circular debt remained a major issue for companies.
The KSE-100 listed power generation & distribution sector saw a 31% YoY increase in its profitability, clocking in at Rs13 billion, compared to a profit of Rs9.92bn in the same period last year (SPLY).
The sector includes; HUBC, KAPCO, KEL, NCPL, NPL, PKGP, and SPWL.
However, the compiled results are exclusive of KEL's financials.
KEL is a regulated entity under the Regulation of Generation, Transmission and Distribution of Electric Power Act, 1997 (NEPRA Act) and prepares its financial statements in accordance with the tariff determined by the NEPRA.
Due to the absence of the Multi-Year Tariff (MYT) adjustment by NEPRA, K-Electric Limited's (PSX: KEL) financial statements for the period ended March 31, 2024, were not finalized within the stipulated timeline, and were postponed.
As per the results compiled by Mettis Global of the income statements of the sector, sales revenue rose 16.6% YoY to Rs25.6bn as compared to Rs21.95bn in SPLY.
To note, the sector’s second-largest player, KAPCO, made no sales during the period as the Power Purchase Agreement (PPA) expired on October 24, 2023.
Since then, the plant has been out of operation.
KAPCO continues to pursue the National Electric Power Regulatory Authority (NEPRA) for identification of the power purchaser with which it will sign the energy purchase agreement, and the determination of final tariff following the hearing of the company's tariff petition in October.
The matter is at an advanced stage, the company has said.
NEPRA in August 2023 approved a provisional tariff for KAPCO for 500 MWs on 'take and pay' basis following inclusion of the company in the Indicative Generation Capacity Expansion Plan (IGCEP) (2022-2031) till 2026 by NEPRA due to system requirements of the National Transmission and Dispatch Company (NTDC).
Due to regulatory impediments, KAPCO has still not signed an energy purchase agreement with a power purchaser.
During the review quarter, the sector's cost of sales also rose by 15.8% YoY but was lesser than proportionate to sales rise, which improved the gross profit by 17.6% YoY to Rs11.82bn in Q1 2024.
The gross margins inched up to 46.18% as compared to 45.80% in SPLY.
Other income saw a jump of 21.8% YoY to stand at Rs6.76bn in Q1 2024 as compared to Rs5.54bn in SPLY.
The sector's finance cost rose slightly by 1.5% YoY and stood at Rs3.93bn as compared to Rs3.87bn in SPLY, mainly due to higher interest rates.
On the tax front, the sector paid a higher tax worth Rs830.82m against the Rs500.23m paid in the corresponding period of last year, depicting a rise of 66.1% YoY.
| Unconsolidated (un-audited) Financial Results for quarter ended March 31, 2024 (Rupees in '000) | |||
|---|---|---|---|
| Mar 24 | Mar 23 | % Change | |
| Sales | 25,601,618 | 21,954,289 | 16.61% |
| Cost of sales | (13,777,576) | (11,898,591) | 15.79% |
| Gross Profit/ (loss) | 11,824,042 | 10,055,697 | 17.59% |
| Administrative Expenses | (670,746) | (642,944) | 4.32% |
| Others | – | 441,267 | – |
| Other Income | 6,755,352 | 5,544,254 | 21.84% |
| Other Operating Expenses | (152,321) | (1,103,591) | -86.20% |
| Finance Cost | (3,929,326) | (3,872,587) | 1.47% |
| Profit/ (loss) before taxation | 13,827,001 | 10,422,096 | 32.67% |
| Taxation | (830,819) | (500,229) | 66.09% |
| Net profit/ (loss) for the period | 12,996,182 | 9,921,867 | 30.99% |
The circular debt is still a major issue for companies operating in the power sector.
As of March 2024, the sector has trade debts receivable worth Rs132bn, albeit a fall of 9% YoY.
The power purchasers continue to default on their payment obligations.
However, a large chunk of this debt is considered good, as it is secured by a guarantee from the Government of Pakistan (GoP) under the Implementation Agreement and are in the normal course of business.
The circular debt (CD) stock stabilized in late 2023 and early 2024, secured by continued efforts to bring energy tariffs in line with costs and, in the power sector, continued anti-theft measures.
Pakistan’s power sector circular debt stands at Rs2.6 trillion (2.5% of GDP), and has remained broadly flat since October 2023.
The International Monetary Fund (IMF) in its second and final review report has said that restoring energy sector viability requires strong cost-side reforms.
Pakistan’s power sector circular debt stable since October 2023: IMF report
This includes (i) continuing efforts underway to improve transmission infrastructure, including for better integration and expansion of renewable energy capacity; (ii) improving DISCO performance via either privatization or long-term management concessions; (iii) moving captive power demand to the grid; (iv) revisiting, where feasible, the terms of power purchase agreements; and (v) continuing to convert publicly-guaranteed PHPL debt into cheaper public debt.
It is worth noting that Pakistan has met the Indicative Target set by the IMF of ceiling on power sector payment arrears, which was capped at Rs385bn. The country’s power sector payment arrears amounted to Rs378bn by end-December 2023, excluding non-recoveries.
Power sector payment arrears are defined as power sector payables in arrears that arise from: (i) non-recoveries from supply to Azad Jammu and Kashmir (AJ&K), industrial support package, other federal and provincial governments including FATA, private consumers, and Baluchistan Tube Wells; (ii) accrued markup from the servicing of PHPL; (iii) line losses and non-collections that are not recognized by NEPRA; (iv) GST non-refunds,; (iv) late payment surcharges; (v) delays in subsidy payments; and (vi) delays in tariff determinations.
Copyright Mettis Link News
Posted on: 2024-05-13T18:00:00+05:00
