Pakistan Research

Electricity | Sector Update

Electricity
November 9, 2015

MARKET WEIGHT
Coal conversion to lift valuations for LPL/PKGP

Upsides from coal converison: NEPRA has approved tariff petition for coal conversion
submitted by existing RFO based plants; Lalpir, Pakgen and Saba Power. In this piece,
Tariff (PKR/KWh) Years 1-10 Years 11-25
we discuss major findings of coal conversion tariff and its potential impact on Fair
Capacity Charges
Values of listed IPPs under our coverage. The approved tariff allows for continuation
O&M - L - 0.1535
of Existing Capacity Payments till the remaining term of PPA (May 2028) excluding
O&M - F - 0.1535
Cost of Working Capital, which is to be reimbursed separately under the new tariff
Insurance - 0.0988
based on working capital requirements on coal. The new tariff, based on 20% Return
Cost of WC 0.2447 0.2447
on Equity, shall become effective from commercial operations date. Moreover,
ROE 0.3918 0.3918
existing fuel losses due to efficiency differential between benchmark and actual
Debt 0.7346 -
Existing - Esc 0.9297 -
efficiency should be eliminated to a large extent once operations convert to coal.
Existing - Non Esc 0.0055 -
Based on our findings of above mentioned factors, the companies are likely to
Total 2.3063 1.0423
witness higher cash flows from commercial operations (assumed Dec-18) till existing
Energy Charges PPA expiration (May 2028). Post May 2028, shareholders returns shall be restricted to
Fuel 4.5727 4.5727 20% Return on Equity provided in the new tariff. Incorporating upside from coal
VOM - L 0.0456 0.0456 conversion, assuming absence of fuel losses and O&M savings, our fair values of
VOM - F 0.0684 0.0684 Lalpir/Pakgen would increase to around PKR 45/share and USD IRRs to 16%-17%.
Ash 0.2200 0.2200
Coal conversion salient features: NEPRA has approved a project cost of USD
Total 4.9067 4.9067
228.4mn for Lalpir power and USD 230.3mn for Pakgen power with debt and equity
financing at 75% and 25% respectively. Net Dependable Capacity for determination
of capacity payments is 329.4 MW for Lalpir power and 332.2 MW for Pakgen power
whereas 36.6% benchmark efficiency has been approved for fuel payments. Based
on current PKR/USD rate of 105.2, 20% ROE of the coal project comes out to PKR 3.2-
3.3/share on IPPs books. Approved construction period is of 24 months which
includes a downtime of 6 months during which IPPs will continue to receive capacity
payments.

Lalpir Pakgen
Project Cost USD mn 228.4 230.3
Debt - 75% " 171.3 172.7
Equity - 25% " 57.1 57.6
Net Capacity MW 329.4 332.2
Project Cost/ MW 0.69 0.69
Construction time Months 24.0 24.0

Risks to investment case: Apart from absence of fuel losses and O&M savings, our
Shahmir Kurd base case assumes equity portion of the project will also be financed by raising debt.
Our investment case is subject to the following risks; 1) emergence of fuel losses as
+92 (21)35296888-2303
NEPRA has approved fuel efficiency of 36.6% against demand of 35.6% by both IPPs,
+92 (21)35296924
2) potential downward revision of Existing Capacity Payments as Cost of Working
[email protected] Capital will be trued-up at the time of COD based on RFO price, 3) increased debt
www.ocm.com.pk servicing costs for equity portion in a rising interest rate scenario and, 4) uncertainty
over coal logistics.

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disclosures.
Electricity | Sector Update November 9, 2015

Analyst Certification
The research analyst(s), Shahmir Kurd, for this report certifies that: (1) all of the views expressed in this report accurately
reflect his personal views about any and all of the subject securities or issuers; and (2) no part of any of the research
analysts compensation was, is, or will be directly or indirectly related to the specific recommendations or views
expressed by the research analyst(s) in this report.

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