The unaudited financial statements for the key power sector player Nishat Chunian Power Limited (NCPL), for the half-year ended December 31, 2024, has reported a significant net loss of Rs 3.73 billion, a polar opposite to the Rs 2.43 billion profit recorded in the same period last year.
The company’s revenue plummeted by 68.1% to Rs 2.78 billion, down from Rs 8.72 billion in H1 2023, primarily due to a substantial adjustment of Rs 5.59 billion related to payments from the Central Power Purchasing Agency (CPPA-G) after the renegotiation of Power Purchase Agreements (PPAs) with Independent Power Producers (IPPs) such as NCPL.
As a response to these financials, the company’s share price dropped by nearly 8% in the day’s trade, closing at Rs 25.56.
But why has NCPL paid such a large sum in an adjustment? And how is revising a years old agreement, revising which is in the interest of the taxpayer, reducing the breathing space for a major IPP?
A story of renegotiating the PPAs
In the early 2000s, Pakistan faced a significant energy shortfall, prompting the government to introduce the 2002 Power Policy. This initiative aimed to attract private sector investment into the power generation sector to bridge the electricity supply-demand gap. It was against this backdrop that Nishat Chunian Power Limited (NCPL) was incorporated on February 23, 2007. The company’s mission was clear: to build, own, operate, and maintain a fuel-fired power station with a gross capacity of 200 MW.
By July 21, 2010, NCPL had entered into a 25-year Power Purchase Agreement (PPA) with its sole customer, the Central Power Purchasing Agency (Guarantee) Ltd (CPPA-G). This long-term contract was designed to provide a stable revenue stream for NCPL while ensuring a consistent power supply to the national grid.
CPPA-G is Pakistan’s central power buyer, procuring electricity from IPPs and some GENCOs under Power Purchase Agreements (PPAs). To ensure stable electricity supply. These contracts guarantee capacity payments, meaning IPPs get paid even if their power isn’t used, protecting investors but burdening taxpayers.
As time progressed, concerns emerged regarding the financial implications of the initial agreements made under the 2002 Power Policy. Critics argued that the terms of these PPAs were heavily skewed in favour of the Independent Power Producers (IPPs) like NCPL. The guaranteed capacity payments, irrespective of actual power off-take, placed a substantial financial burden on the government. This structure meant that taxpayers were effectively subsidising these payments, leading to increased electricity tariffs and contributing to the circular debt crisis in the energy sector.
With the government grappling to come across cash to pay to the IPPs and the capacity payments piling up on each other, adding to the ever increasing circular debt that the government owed to the IPPs, it was inevitable that a way around this should be found.
After years of failed attempts at renegotiating these PPAs, the government, in its current tenure, was finally able to initiate renegotiations with IPPs to amend the existing agreements. On December 4, 2024, NCPL’s Board of Directors approved significant amendments to its PPA and Implementation Agreement.
These changes, effective from November 1, 2024, introduced a ‘Hybrid Take and Pay’ model, replacing the previous ‘Take or Pay’ structure. This shift means that payments to NCPL are now more closely aligned with the actual electricity consumed, rather than a fixed capacity payment.
Modifications were made to how tariffs are adjusted over time, aiming for a more balanced approach that reflects market realities. The Operations and Maintenance (O&M) tariffs were also recalibrated to ensure they are fair and justifiable.
A new model was subsequently implemented to determine returns on equity, balancing investor interests with consumer protection. The insurance premium tariff was capped at 0.9% of the Engineering, Procurement, and Construction (EPC) cost, also preventing excessive charges.
On the face of it, these amendments aim to alleviate the financial strain on the government, the taxpayers, and even the IPPs to an extent, they also present challenges for NCPL. The transition to a ‘Hybrid Take and Pay’ model introduces variability in revenue, as earnings are now directly tied to the actual power dispatched rather than a guaranteed payment. This change necessitates more precise demand forecasting and operational efficiency to continue being profitable.
Moreover, the capping of the insurance premium tariff and adjustments in profit sharing mean that NCPL may experience reduced margins. These financial setbacks require the company to reassess its cost structures and explore avenues for operational optimisation.
One additional problem that was there in the previous system was a delay in payments from CPPA-G. While the IPP had a predictable cash flow, it was often delayed due to liquidity problems of the federal government and lack of forex reserves. What this meant was that the company was able to declare profits, a lot of those profits were attributed to the promise of a payment on a future date, on the back of a sovereign guarantee.
With most of the PPAs with IPPs now revised and payment schedule now dependent upon the amount of electricity supplied, the CPPA-G is expected to have better liquidity and in turn, lesser debt, which means lesser receivables on the IPPs’ balance sheet.
In essence, while the original PPA provided NCPL with financial predictability, it inadvertently imposed a heavy burden on the nation’s finances. The new arrangement seeks to rectify this, promoting a more sustainable energy sector.
But for NCPL, this evolution also signifies a shift towards a more market-responsive operation, demanding agility and strategic foresight in navigating the redefined energy landscape, the beginnings of which are shakier than expected.
Half-Year financials:
Now, Nishat Chunian Power’s financial results for H1 2024 released on Thursday, reveal a challenging period for the company. Revenue from contracts with customers fell sharply to Rs 2.78 billion, compared to Rs 8.72 billion in H1 2023. The company’s gross profit also declined to Rs 1.64 billion, down from Rs 2.65 billion in the previous year, reflecting lower revenue and higher cost of sales.
The most significant factor contributing to the loss was the Rs 5.59 billion adjustment related to CPPA-G payments. This adjustment, which was not present in the previous year, led to a pre-tax loss of Rs 3.67 billion, compared to a pre-tax profit of Rs2.43 billion in H1 2023.
After accounting for a nominal tax expense of Rs 20.6 million, the company reported a net loss of Rs 3.73 billion, translating to a loss per share of Rs 10.16, compared to earnings per share of Rs 6.60 in H1 2023.
Despite the challenging environment though, Nishat Chunian Power managed to reduce its finance costs to Rs12.1 million, down from Rs 219 million in H1 2023. This reduction was likely due to lower interest rates or improved debt management. However, this was not enough to offset the impact of the CPPA-G adjustment and the decline in revenue.
Future Outlook
Looking ahead, Nishat Chunian Power faces significant challenges in navigating the complexities of Pakistan’s power sector. While the new contract is something that the company has to live with, the gap between the company’s book value per share and its market value suggests a major undervaluation and pessimism in the market.
At its current equity of Rs 23.6 billion, the company’s book value per share comes out to be Rs 64.25. Meanwhile, the close at Rs 25.56 on Thursday and its hovering below the Rs 30 mark since the new deal, is indicative of pessimism about the company’s ability to generate sustainable returns in the future.
Despite a historic rally in the last two months, the NCPL stock price has remained below the 30-rupee mark since the hybrid take and pay deal has been signed in November. Usually what this means is that if it were liquidated today, NCPL shareholders might get more than what they would by trading their shares in the market.
However, this doesn’t always mean liquidation is the best option. With a name and balance sheet as big as Nishat group’s it is not just likely but also expected that a turnaround is in the works.
The flip side of the coin for NCPL is that under the new deal with the government, NCPL agreed to write off over Rs 5.59 billion in trade debts as part of the settlement. In return, the company will receive cleared payments for its remaining receivables, which had previously been stuck due to delayed government disbursements, the effect of these payments is likely to be seen in the financials of the upcoming quarters. As we can see, the one-time adjustment significantly impacted NCPL’s latest financials, pushing it into a Rs 3.73 billion loss for H1 2024.
However, this settlement also means that NCPL now has a cleaner balance sheet with fewer outstanding receivables, potentially improving its cash flow in the coming quarters. Some market analysts believe this could allow the company to even resume paying strong cash dividends, as future earnings would no longer be weighed down by uncertain payments and bad debts. This shift will become clearer in the next financial results, where NCPL’s actual cash position could act as a silver lining and showcase some benefits of the deal.
What is concerning however, is that all the IPP’s did not have the same renegotiation deals nor the same financial position. So what if some of them stop making sense to run and start making sense to liquidate. Will that increase the likelihood of the country going back to square one, in terms of electricity shortfall?
