KAPCO – adjustment of LDs in FY21

The highlight of FY21 for the IPPs including Kot Addu Power Company Limited (PSX: KAPCO) has been the agreement reached with the government and the extension of Power Purchase Agreement finally coming through, resolving the issue of liquidity damages (LDs) with Central Power Purchasing Agency (CPPA-G). Due to non-availability of the plant for electricity dispatch from FY09-16, KAPCO had accumulated liquidity damages of Rs27.9 billion as per the IPP’s 9MFY21 financial statements. The issue of LDs emerged as the IPP was not able dispatch electricity during the said period due to ill-timed clearance of dues by the government, which were shown as receivables in KAPCO’s accounts. However, the decision reached during the year on the extension of PPA by 16 months has been a major factor is explaining FY21 earnings.

This can be seen as a decline in net revenue of the IPP, where the 30 percent year-on-year decline in topline was primarily due to the write down of revenue by Rs19.2 billion – shown as capacity purchase price (CPP) adjustment or the adjustment of their liquidity damages (LDs). This also pulled overall gross margins for KAPCO.

Barring the CPP adjustment, revenues for KAPCO decreased by three percent year-on-year due to lower RLNG prices despite better or higher output in FY21 overall. However, gross revenues showed noticeable growth in the last quarter of FY21 not only due to better dispatches of electricity, but also recovery in RLNG prices as well as furnace oil prices.

Where the CPP adjustment to revenue dragged margins, the IPP’s COGS and operating expenses remained lower despite high operation and maintenance activity during the year including replacement, inspection and major overhauling of its turbines and units. And while finance cost also declined due to lower interest rates and lower short-term borrowings, other income dropped due to the same i.e., lower interest rates.

KAPCO’s PPA has been extended for 16 months. With the resolution of a major concern for the IPP – the liquidity damages, the investor interest can be said to be better for KAPCO today versus last year due to lower uncertainty. KAPCO also announced a Rs3.5 per share cash dividend for 4QFY21, which took the overall dividend to Rs10 per share for FY21.