THE latest entrant to the listed independent power producer sector, Engro Powergen Qadirpur Ltd (EPQL), received a positive response from investors during its initial public offering last month.

The event marks the second successful IPO transaction undertaken by the Engro conglomerate in under a year, with Engro Fertiliser making it to the bourses last December.

A total of 40.475m shares — representing 12.5pc of the IPP’s paid-up capital — were offered at a final price (including CDC charges and stamp duty) of Rs30.078 per share to the general public. Engro Corp. divested its entire holding — 32m shares or 9.88pc of paid-up capital — while Engro Powergen Ltd (EPQL’s parent company) divested 8.475m shares (2.62pc). The company raised over Rs1.2bn from the IPO.

The public offer came after the company had privately placed another 40.475m shares with institutional investors, high net worth individuals and its employees.

“There was very strong institutional participation. Almost all major players had taken part in the private offering; however, only those who had bid higher were allotted shares,” a market source told Dawn. He added that the publicly available list of institutional investors would have included more big names had the cut-off price been set lower by a few rupees.

Meanwhile, in the IPO, EPQL received applications for over 90.96m shares —2.25 times the amount offered. The company seems to have preferred small retail investors, as it said all applications for 500, 1,000, 1,500 and 2,000 shares had been accepted. The shares are expected to begin trading before the end of the month.

Habib Bank Ltd and Bank Alfalah were the lead underwriters and financial advisors, while another 10 local banks were designated ‘bankers to the offer’.

The public offer came after the Engro Powergen Qadirpur Ltd had privately placed another 40.475m shares with institutional investors and high net worth individuals

Plant details: Unlike other IPPs in the country, EPQL operates its 278.3MW Chinese-made combined cycle plant on permeate gas, an impure by-product of the gas purification process. It receives 75mmcfd gas from the Qadirpur field near Ghotki, Sindh, under a gas sale agreement with SNGPL. The field is owned by OGDC.

Multiple sector analysts have said since the gas has low BTU value (a measure of heat), it is inadequate for any other sector. “Since there is no alternate use of permeate gas, the plant’s gas supply will be more certain” than those for other companies, said a sector watcher.

The plant, created under the Power Policy 2002, is guaranteed a 15pc dollar-based internal rate of return, the company said.

Financial performance: EPQL’s financial performance since 2010 depicted a rising trajectory till end-2012. Sales multiplied to Rs11.7bn by end-2012 from Rs5.7bn at end-2010. This corresponded with a rise in after-tax earnings to Rs2.1bn from Rs1.1bn during the period.

However, the year 2013 saw the power plant shut down for over 70 days during October-December. Quoting the company’s management, a research report from M.M. Securities said the shutdown was due to a “fault in the gas turbine generator rotor”.

The company said it had to import manpower from abroad to fix the problem as local technical expertise was not available. The plant came back online on December 27, but the hiatus caused the company’s 2013 earnings to decline by 31pc when compared with those of 2012, and by 18pc against 2011, said the report.

In the six months till June, EPQL posted sales of Rs6.5bn, up 25pc from the same period last year. Its finance costs came in around Rs333.2m, against Rs475.7m for the entire 2013. Analysts expect it to use a major share of proceeds from the IPO to pay down its debt.

Circular debt: The foremost risk facing EPQL is the perennial issue of circular debt, which continues to put a cloud over earnings projections of virtually all companies involved in various stages of the energy supply chain. After the clearing of Rs500bn of circular debt that had piled up by last June, power sector dues have again reached the Rs300bn-mark.

Addressing the issue, the company said its “receivables under sale of electricity are secured against a GoP guarantee through the implementation agreement. Additionally, being an IPP operating on gas, the company contributes one of the cheapest forms of power to the national grid”.

A market source agreed that EPQL is likely to see a slower build-up in circular debt due to its lower cost of production when compared with furnace oil-based plants.

Gas supply risk: While gas curtailment appears to be a remote possibility for EPQL, some energy analysts have warned that it can hope to rely on permeate gas for only a few years.

“The Qadirpur field has already seen its production plateau and present gas production is about 10-15pc from its peak of 550mmcfd. The company expects the availability of permeate gas to scale down from FY17 onwards, which will require the plant to be run on comingled fuel (gas and high-speed diesel),” wrote Hassaan Bin Ghafoor of Taurus Securities in a research note last month.

Published in Dawn, Economic & Business, October 20th, 2014