Electricity: KARACHI ELECTRIC SUPPLY COMPANY - Analysis of Financial Statements Financial Year 2003 - Financial Year 2009
Karachi Electric Supply Company (KESC) was incorporated on September 13, 1913, under the Indian Companies Act, 1882. The company was nationalised in 1952, but again privatised on November 29, 2005. KESC came under the new management in September, 2008; a significant number of professional managers with experience in running utility and other large companies have joined under this management and will be running it until the company is turned into a best practice utility.
KESC is listed on all the three stock exchanges of Pakistan. Pakistan's electricity demand is expected to cross 20,000MWh by 2010. This will create a supply-demand deficit of around 5,500MWh in 2010. Almost 40% of the global electricity is produced through coal while 20% is produced from gas. In the context of the production of electricity on competitive rates; Pakistan has large reserves of gas and coal, and if proper infrastructure is developed, the country's per unit rate could be amongst the lowest in the world. Pakistan has also a great potential in terms of hydro-electricity, as the government has plans to build more dams in the coming years specifically for hydel power generation.
LIQUIDITY
The liquidity position of the company has been under pressure for a long time principally on the back of poor performance and managerial policy. The current ratio in FY08 stood at 0.53 and in FY09, we see a marginal improvement and the ratio stands at 0.79. The improvement seen is mainly on the back of a 69% increase in the current assets. However the breakup of increase in current assets reveals that the growth in current assets was mainly fueled by a 53% growth in Trade Debts, 25% growth in Amounts due from the government and a staggering 174% rise in other receivables.
Other receivables, mostly comprise of sales tax (Rs 5715.28 million), which include a sum of Rs 185.225 million relating to the refund claims for the period 2006-07 and Rs 425.234 million relating to the refund claims for the period 2000-2006, aggregating to Rs 610.459 million, withheld by the sales tax department on account of sales tax in connection with service charges, sales tax on meter burnt charges, input inadmissible under SRO and some other matters. The management is of the view, that the ultimate outcome of this matter will be decided in favour of the company.
However, to be prudent, the company has made an aggregate provision of Rs 232.050 million, tariff adjustments (Rs 14,319.9 million) and subsidies due from government on selected class of customers (Rs 285.8 million). It is also worth noting that as much as 96% of trade debts are unsecured and provisions against doubtful debts stand at Rs 14,271.67 million. The current liabilities registered a growth of around 13% for FY09. Power purchases registered a decline of 28.7%, 71% decline in fuel and gas purchases.
This is principally due to the management's policy of saving on fuel and power purchases costs. Interestingly, the electricity duty owed to the government stood at Rs 1157.9 million, a 76% from the previous year's expense. Electricity duty, tax deducted at source and PTV license fee are collected by the company from the consumers on behalf of the concerned authorities. Payments are made thereto upon receipt of these dues from the consumers. With the current expansion plans on the cards, coupled with hefty financial charges and other operational losses are keeping the pressure on the utility's liquidity.
PROFITABILITY
Profitability has remained negative over the six-year period under review. The main reasons for these losses are, firstly, the Transmission and Distribution (T&D) losses due to old and obsolete distribution network and theft of electricity. KESC's customer base includes 1.6 million residential consumers, 520,000 commercial and 37,000 industrial and agricultural consumers. The unit cost is subject to political decision-making as a huge chunk of domestic customers are affected by an increase in per unit price. In most of the preceding and the current year prices have been kept artificially low as fuel prices have sky rocketed during many previous years and for the most part last year as well.
For FY09, the revenues grew by 27% and stood at Rs 85,224 million. However, operating expenses rose by 17% during the same period and being substantial, resulted in a gross loss of Rs 6602 million. This is lower than FY08's loss of Rs 10,887 million. The rise in expenses can be attributed to the rise in purchase of electricity from NTDC and KANNUP whereas the fuel and gas consumption showed a modest rise. Furthermore the advertisements, sponsorships, employee benefit schemes, free electricity to employees and other such expenses have also left an impact on the company's profitability performance.
DEBT MANAGEMENT
Total debt to total asset has jumped to 99.86% in FY09 as compared to 92.57% in FY08. This is attributed to the multiple-fold rise in current maturity of long-term financing loans, which stand at Rs 15870 million in FY09. The mark-up bill also shows a growth of 53% in the same period. The trade payables during FY09 stood at Rs 30,289 million, which is almost 21% less than the previous year's ie FY08. The non-current liabilities grew by 114% in FY09 to stand at Rs 70,344 million. Long-term financing is the major factor in the rise of non-current liabilities, standing with a 411% growth to Rs 45,030 million.
This is mainly because of the management's plan to invest in new generation facilities and improving and upgrading of the existing facilities. The execution and completion of these projects are expected to alleviate the supply problems of the under equipped power utility. Debt to equity ratio increased at an alarmingly high level of 73113.46% in FY09 from an already phenomenal figure of 1245.13% in FY08 due to the decrease in equity due to higher accumulated losses and subsequent provisioning to accommodate the losses arising principally form theft and transmission losses.
Days sales outstanding (DSO) has increased from 89.74 days in FY08 to 118 days in FY09, mainly because of the rise in trade debts. This was also the main reason for the increase in the operating cycle from 123.93 days in FY08 to 147 days in FY09. The sales to equity ratio stood at 326, mainly due to a sharp decline in the equity side of balance sheet as a result of accumulated losses.
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FY'00 FY'01 FY'02 FY'03 FY'04 FY'05 FY'06 FY'07 FY'08 FY'09
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Units Generated 7,745 7,989 8,709 8,908 9,274 9,304 9,130 8,168 8,662 8262
Units Purchased 3,701 3,688 3,406 3,809 3,664 4,289 5,370 6,707 6,526 7005
Units Sold 6,430 6,924 6,717 7,041 7,912 8,505 9,060 9,367 9,569 9396
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FUTURE OUTLOOK
The privatization of the company took place in November 2005, with the transfer of 73% shares along with the management control to KES Power and others. The new management has employed Siemens Pakistan Engineering Limited as the operations and management contractor for the operation and management of the company. The company is going through a transitional period although net losses have continued to increase over the past few years; it is expected that the rehabilitation of transmission and distribution network which has been under execution in a phased manner, will decrease these losses and eventually the company will start making profits.
The construction of new power plants to bridge the supply-demand gap is an integral component of the strategy of the new KESC management to turn the company into an efficient and profitable entity at the earliest. In 2007, two new projects were planned, a 220 MW combined cycle gas power plant at Korangi (Phase 1), and a 560 MW gas-fired combined cycle plant at Bin Qasim (Phase 2). Generation from the 220 MW power plant has since begun, and the plant is fully commissioned. Following some initial delays due to contract negotiations with the selected contractor, the 560 MW, Phase-II project is now also underway.
The EPC contract has been amended and signed, advance payments amounting to US $56 million have been paid, and the company is in the process of establishing the first Letter of Credit under the contract. Part of the new equity injection by the new shareholders amounting to US $361 million will be utilized to fund the capital costs of this project, along with medium and long-term finance facilities upto Rs 25 billion from local and international financial institutions. Pursuant to the loan agreements and subscription agreements between KESC, IFC and ADB, IFC and ADB shall have the option to subscribe and pay for KESC ordinary shares at a minimum price of Rs 3.50 upto a maximum of USD 25 million each to be converted to equivalent Rs at applicable exchange rate on the date of subscription with a cap of USD 1=Rs 90.
IFC and ADB will essentially convert a portion of their loans to the company into equity, reducing the debt burden on the Company and enhancing capital. The turnaround strategy devised and actively pursued by KESC management with the complete support of major shareholders viz. KES Power and GOP and capex financing from new equity injection of US $361 million over three years and through local and international financial institutions is likely to produce improved operational & financial results which would benefit all the stakeholders, especially the minority shareholders during the forthcoming years.
The Company has also sped up the work on the construction of 560MWs open cycle thermal plant at Bin Qasim Power Station, called BQPS-II, in partnership with a Chinese firm, Harbin. The advance payment of $56 million was made and a Letter of Credit worth $75 million had been opened recently. The company therefore has the potential to turn profitable and achieve operational excellence. Also, conservatively speaking, some improvements have already been noticed such as Announced and scheduled load shedding, reduction in tripping, more consistency and accuracy in billing and improvements of customer support. All these measure are indicating that KESC is inching towards its position that it strives to be at in its vision statement.
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FINANCIAL RATIOS
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2003 2004 2005 2006 2007 2008 2009
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LIQUIDITY RATIOS
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Current ratio 1.31 2.03 1.69 1.19 0.75 0.53 0.79
Quick Ratio 1.19 1.74 1.36 1.00 0.61 0.44 0.71
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ASSET MANAGEMENT
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Operating cycle(days) 133.97 112.37 114.31 96.17 106.80 123.93 147.51
Inventory turnover (days) 21.15 27.28 35.54 29.71 37.46 34.19 29.01
Days sales outstanding (days) 112.82 85.09 78.76 66.46 69.34 89.74 118.50
Total assets turnover 0.50 0.60 0.63 0.64 0.58 0.54 0.45
Sales-Equity 1.29 1.86 1.06 1.35 1.94 7.20 -6.67
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PROFITABILITY
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Return on total assets -11.71% 1.74% 1.09% -10.97% -15.75% -17.27% -11.84%
Return on equity -33.14% 5.38% 1.84% -23.38% -52.57% -232.27% -8668.53%
Gross profit on sale -29.22% -9.94% -17.78% -25.03% -15.83% -21.86% -11.33%
Profit margin on sales -25.61% 2.90% 1.73% -17.28% -27.14% -32.27% -26.57%
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DEBT MANAGEMENT
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Total debt to total asset 64.66% 67.72% 40.39% 53.07% 70.05% 92.57% 99.86%
Long term debt to assets 43.10% 52.08% 21.87% 24.88% 26.59% 35.40% 53.79%
Debt to equity 182.98% 209.82% 67.76% 113.06% 233.85% 1245.13% -1494.77%
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COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
DISCLAIMER: No reliance should be placed on the [above information] by any one for making any financial, investment and business decision. The [above information] is general in nature and has not been prepared for any specific decision making process. [The newspaper] has not independently verified all of the [above information] and has relied on sources that have been deemed reliable in the past. Accordingly, the newspaper or any its staff or sources of information do not bear any liability or responsibility of any consequences for decisions or actions based on the [above information].
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