RLNG IPP: Four Years of Receivables, an ECL Judgement and a Dividend Funded by Debt
A 220MW RLNG-fired independent power producer sells all output to CPPA-G under a 30-year energy purchase agreement. Revenue is PKR 12bn (70% capacity payments, 30% energy). Receivables from CPPA-G total PKR 48bn - four years of revenue. Ageing: 15% under 90 days, 25% between 91 and 365 days, and 60% over one year. Nothing has been written off since commissioning in 2011. The company carries PKR 26bn of debt at KIBOR+200bp with a covenant requiring net debt/EBITDA below 4.0x. EBITDA is PKR 7.0bn and profit after tax is PKR 4.2bn. Stated policy is to distribute 70% of PAT. The EPA provides for late payment surcharge at KIBOR+2%, but the company recognises it only on receipt, arguing CPPA-G disputes the computation. The auditor has issued a key audit matter on expected credit losses and on going-concern disclosure. The board is due to approve the final dividend next month.
1. Build an ECL estimate from the ageing matrix and critique it. Is a large provision the right answer?
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Mechanical matrix. Applying 0.5% to the under-90-day bucket, 2% to 91–365 days and 10% to over one year:
- 48 x 0.15 x 0.005 = PKR 0.04bn
- 48 x 0.25 x 0.02 = PKR 0.24bn
- 48 x 0.60 x 0.10 = PKR 2.88bn
- Total provision ≈ PKR 3.16bn, about 75% of PAT.
But the matrix is the wrong starting point for the judgement. IFRS 9 requires an unbiased, probability-weighted estimate, not a formulaic ageing table. The counterparty is a government-backed aggregator that has never defaulted in thirteen years; there is no evidence of principal loss, only of delay. Applying a generic 10% loss-given-default to a sovereign-linked receivable overstates credit loss.
Separate credit risk from time value. The real economic damage is the financing cost of carrying PKR 48bn for four years: at 13% that is roughly PKR 6.2bn a year of forgone return - larger than the entire matrix provision, and it hits the company through interest cost and lost reinvestment, not through ECL. Discounting the receivable to present value under IFRS 9's measurement requirement captures part of this.
Defensible position. A low PD (1–3%) on the over-one-year bucket, supported by the recovery history and government guarantee, with full disclosure of the PKR 48bn concentration and a sensitivity showing what a 12-month extension of delay would cost. The provision is not the whole story; liquidity is.
2. Should the company accrue late payment surcharge? Quantify the effect on reported earnings quality.
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The accounting test. Under IFRS 15, variable consideration is included only to the extent it is highly probable that a significant reversal will not occur; under IAS 37, a reimbursement is recognised only when receipt is virtually certain. Where CPPA-G disputes the LPS computation and payment has historically arrived, if at all, only alongside the primary invoice, the constraint is not met. Do not accrue.
But the non-accrual is also an analytical signal. LPS at KIBOR+2% on PKR 48bn is roughly 15% x 48 = PKR 7.2bn a year of contractual compensation the company has a legal claim to but cannot book. That is more than the PKR 4.2bn reported PAT: essentially the entire reported profit is smaller than the compensation the company is forgoing by being paid four years late.
Read it as a measurement of the subsidy. The four-year lag is effectively an interest-free loan from the IPP to the power chain, funded by the IPP's own KIBOR+200bp borrowings. The 200bp negative carry on PKR 48bn is roughly PKR 1bn a year of recurring value transfer.
Earnings-quality conclusion. Reported PAT overstates distributable capacity because it excludes both the time-value cost and the unbooked LPS. An analyst should present PAT alongside a 'cash PAT' that charges the receivable at the cost of debt. Note also that if the company ever does receive LPS, the resulting one-off gain should be excluded from sustainable earnings rather than capitalised in a multiple.
3. Assess the 70% dividend against the covenant. What should the board do?
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Covenant arithmetic. A 70% payout on PKR 4.2bn is PKR 2.94bn. Operating cash generation is weak because collections lag revenue by years, so the dividend is effectively funded by drawing on the working-capital or project facility. Net debt moves from 26.0bn to 28.9bn (assuming no cash buffer), so net debt/EBITDA rises from 26.0/7.0 = 3.71x to 28.9/7.0 = 4.13x - a breach of the 4.0x covenant.
Consequences of a breach. A covenant breach on a project-finance-style facility typically triggers a cash trap or standstill, restricting further distributions and sometimes accelerating repayment. That outcome is far worse than a reduced dividend.
What the board should weigh. Equity holders have received distributions while the balance sheet absorbed the receivable build; the dividend is being paid with borrowed money against earnings that have not converted into cash. A dividend funded by debt increases leverage without increasing cash flow, so it transfers value from lenders to shareholders only until the covenant bites.
Recommendation. Declare a materially reduced dividend - at most 30–35% of PAT (PKR 1.3–1.5bn), which keeps leverage below 3.9x and preserves a cushion for KIBOR moves - or pay in a mix that does not require new borrowing. Simultaneously pursue a receivables settlement or securitisation, since the covenant headroom problem is a receivable problem, not an earnings problem, and disclose the going-concern basis clearly.