KARACHI – After a broad improvement in the first half of FY11 (July to December 2010), Pakistan’s ratio power tariff relative to generation costs has weakened considerably. While higher fuel oil prices and increasing reliance on oil based power generation in the face of a national gas supply shortage, it is estimated that the power cost for state owned WAPDA is presently 31 percent higher than retail tariff in comparison to 15 to16 percent in 1HFY11.
Calculations suggest that current Pakistan power tariff rate (Rs 8.68 per KWh) integrates a crude oil price of only $57 per barrel said Farah Marwat at KASB, adding that in the absence of rapid corrective action by the government, this tariff versus cost mismatch will further drive up power sector inter-corporate debt. It is also noted that as of December 2010, joint receivables for HUBCO and KAPCO stood at Rs126 billion, which translates receivable into 300 days.
IPP earnings and for the most part dividends are largely cushioned from inter-corporate debt risk due to a web of cross-company interest payments where IPPs pay interest in penalties on overdue payments to fuel suppliers and receive interest from WAPDA. It was noted that the rising balance sheet risk would lend to dividend uncertainty. Concerns have arisen that a sharp spike in intercorporate debt could potentially result in multiple de-ratings for IPPs.
She said that if intercorporate debt rises, it is believed that KAPCO would this time round be in a potentially better situation than its peer HUBCO, while KAPCO’s FY10 earnings and dividends per share was hit by intercorporate debt. She also pointed out that the company was making a negative net interest spread at that point. The same has remained positive since 1QFY11, which suggests relatively cushioned earnings. For HUBCO, the stakes are higher, in our view, she added. With two expansion projects underway, one of which is facing delays, cash flow timing is a matter of great importance, she asserted.
With sector liquidity position weakening and IMF pressure to bridge the tariff gap and eliminate subsidies, the government focus on the issue has increased in recent times. In March 2010, the government reintroduced a two percent month hike in power tariffs that had been dropped in December 2010. Focus is now on arranging Rs100-150 billion in terms of liquidity injection with the government considering a transfer of Rs 150 billion to power holding companies while talks have emerged on securitisation of state owned companies’ dividends.
It was underlined that while a one time cash injection would be a welcome relief, it is believed that the underlying issues of tariff gap, limited bill collection and line losses need to be eliminated for a long term solution to the power crisis.
