Kot Addu Power Company Limited (PSX: KAPCO) announced a significant jump in earnings in 9MFY19 and 3QFY19 recently, the second largest independent power producer in the country. However, the rise did not come from growth in the IPP’s top line as revenues for the firm declined by11 percent and 50 percent, respectively for 9MFY19 and 3QFY19.

The increase in KAPCO’s bottom line came from a steep jump in other income that increased by three times in 9MFY19 and by over two times in 3QFY19. Here the increase in gross margins also supported the company’s earnings as the cost of sales declined in proportion. However, the reason for the fall in revenues was lower power generated in the period under review. For 3QFY19, the IPP generated 385GWh of power with a load factor of only 13 percent, versus 58 percent in 3QFY18. Similarly, the load factor remained 34 percent in 9MFY19 versus 58.7 percent in 9MFY18.

Hence, KAPCO’s profits grew by 89 percent year-on-year in 9MFY19 largely due weaker currency that inflated the ROE component of the capacity payments as well as higher other income led by piling receivables; while the growth in finance cost contained some of the growth. KAPCO’s net profits likely include true-up income. Recall that in 1HFY19, the company saw a significant jump in other income head, which according to the notes to the annual accounts, was due to the “true-up income” along with interest on late payment (penal income) from WAPDA. True-up income represented income resulting from change in US Dollar - PKR exchange rate exceeding the threshold defined in PPA, compared to the rates used for indexation calculation of relevant CPP invoices.

Unlike previous quarters, KAPCO resumed cash dividend announcement, announcing the first interim cash dividend of Rs1.5 per share. However, this payout was lower than dividends for 9MFY18 i.e. Rs4.35 per share. The company’s liquidity took a small breather when the government injected Rs200 billion to partially clear the circular debt, but the threat of receivables pilling up remains significant for KAPCO. In addition to circular debt woes, the looming PPA renewal has become a headache for KAPCO.