Power Sector: FY12 budget expectation

With circular debt portraying itself as a major concern for energy sector along with current electricity shortages in the country, the budget FY11 will bode crucial importance for Power sector. In this report we present the expected measures for Power sector along with its impact on Hub Power Company, in upcoming ‘Budget FY12’. We expect the budget to be Neutral to Positive for the sector.

Expected Measures

§   We expect lower electricity subsidy of Rs170bn in the next budget compared to expected subsidy of Rs220bn during FY11 (target was Rs84bn). This is inclusive of interest on TFCs.

§   Government will maintain 17% GST on electricity.

§   Govt. would reaffirm its commitment to gradually phase out electricity subsidy and power sector restructuring in the upcoming budget as agreed with IMF.

Impact: Neutral to Positive

§         Despite the fact that government has raised electricity rates by 90% during last 3 years, cost of generation is still 35% higher than its selling rate due to higher oil prices.

§         Based on current oil and gas prices, cost of electricity is approx Rs10.4-Rs10.6kwhr (may vary due to inconsistent hydel power generation). While after adjusting for T&D losses the effective average consumer price is around Rs7.7kwhr.

§         In this situation, we expect the existing Rs100bn circular debt will grow to approx Rs220bn by the end of FY12 despite monthly 2% increase in electricity rates as planned by govt.

§         We believe complete elimination of electricity subsidy by 1HFY13. However, it can be eliminated earlier if there is a sharp decline in international oil prices. According to

our estimates if oil prices plunges to US$75-80 per barrel, the subsidy could be eliminated earlier.

§         For IPPs, their cash flows would be better in the beginning of the year but later on it will be affected due to accumulation of circular debt. 

   Outlook: ‘Over-weight’ maintained

In short-term, liquidity issues remain at the heart of power sector as we expect 70% of electricity shortfall is driven by circular debt led liquidity crunch. Currently, effective electricity capacity is 17500MW which after adjusted for transmission losses and idle hydel capacity stands at 14000MW. But due to fuel shortage amid liquidity concerns, the country is generating around 11000MW of electricity against an average demand of 15500MW.

However, during short to medium term government will continue to focus on new oil based power plants which would add expensive electricity to the national grid.  This will again set for another sequence of power tariff rate. Other wise, the circular debt will again grow unless oil price fall in global market.

IPPs earnings are based on fixed return formula under the pre-determined power purchase agreement. Resultantly, their profitability is not affected by any variation in fuel cost and the impact is passed on to Wapda. We maintain ‘Buy’ stance on Hubco which is offering Rupee IRR of 22% with dividend yield of 16% in FY12.

Thanks: T/L