KAPCO's tax exemption to end in 2006

KARACHI (January 10 2005): The tax exemption on Kot Addu Power, which produces 26 percent of the total energy generated by Independent Power Producers and contributes 8 percent of the total energy needs of Pakistan, would end in 2006. Kot Addu Power Company Limited (Kapco) Chief Executive Malcolm Clampin met analysts at the local brokerage houses and formally introduced the company.

The company has a levelised tariff structure, different and superior (from shareholder perspective) from Hubco's 'step-down' tariff, but its tax-holiday is to expire in June 2006 (Hubco's enjoys exemption for its entire project life).

A report of Elixir Securities said that Kapco is the largest and the only multi-fuel IPP in Pakistan. With a nameplate capacity of 1600MW, the plant comprises 10 multi-fuel fired gas turbines and five steam turbines. For FY04, the company posted a profit after tax of Rs 6.9 billion (EPS: Rs 7.88) and paid out Rs 6.50 per share as cash dividends. The company's early-years' tariff issues with Wapda were resolved in 2002.

A key drag to the Kapco story is an effective end to Kapco's tax holiday in June 2006. From FY07 onwards, Kapco's earnings from operations will be taxed at the normal corporate tax rate for listed companies. This compares unfavourably with Hubco, which enjoys a tax holiday throughout its project life.

As per our understanding, the six-year lock-in period, during which International Power was not allowed to dispose of its shareholding in Kapco, has expired. To retain the management control, International Power needs to hold minimum 26 percent shares (out of its total shareholding of 36 percent) of Kapco, while the remaining 10 percent shares can be sold with Wapda's prior approval. Given International Power's 'investment monetising' history, the threat of additional supply will remain in the Kapco.

An analyst from Arif Habib Securities said that the plant uses multiple fuels – gas, furnace oil and High Speed Diesel – and has 15 generating units with a capacity of 1,600 MW.

The Initial Dependable Capacity (IDC) of the plant for tariff purposes has been divided into winter and non-winter months. During winter months the IDC of the plant has been set at 1,336MW, while its IDC has been set at 1,345MW during summer months.

Currently, there are two stakeholders to the Kapco – Wapda and International Power, UK. International Power holds 36 percent shares of the plant while the Wapda holds the remaining 64 percent shareholding of the company.

The Wapda is Kapco's shareholder, customer and lender. It holds a major stake in the company (which even after privatisation would remain at 51.20 percent), and is the sole buyer of electricity from the Kapco as enunciated in the PPA and has signed a Loan Note Agreement with the Kapco on June 27, 1996 with a principal amount of Rs 27,010 million.

The income of Kapco for the ten years ending June 27, 2006 is exempt from income tax. However, after that period this tax exemption on Kapco would end. Accordingly, it is believed that from FY2007, the company would feel the heat of the imposition of tax and hence its profit after taxation would be reduced to almost half. The PC is planning to offer the Kapco share through all three bourses during the current month at Rs 30 per share.

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