Karachi Electric Supply Company Limited

Karachi Electric Supply Company Limited (the Company) was incorporated as a limited liability company in 1913 under the Indian Companies Act of 1882 (now Companies Ordinance, 1984). It was nationalised in 1952 and, after 53 years, was privatised in November 2005. The Company is listed on Karachi, Lahore and Islamabad Stock Exchanges.
KESC is the main power provider for one of the most populous cities in the world. At present, KESC is the only vertically-integrated power utility in Pakistan, in charge of managing the generation, transmission and distribution of electricity to a vast area of 6,000 square kilometres. It came under the new management in 2008 and a significant number of professional managers with experience in running utilities and other large companies joined to help KESC turnaround.
In 2009, two rental power plants of 25MW each were installed in Haroonabad to meet the increasing local demand. Steam turbine became operational in 2009 which has added an additional 26MW of incremental capacity. KES Power Limited (the holding company) holds 72.58 percent (30 June 2010: 72.45 percent) shares in the Company.
FINANCIAL ANALYSIS OF KESC LIMITED
Profitability The total revenue of the company increased by 22 percent year-on-year in FY10 which was attributed to the increase in total units billed and increases in tariff owing to rising cost of generation and power purchase. At the same time, the overall cost of fuel and power purchase led to an increase in the cost of sales by 18 percent year-on-year in FY10 due to the reduction in gas supply to the KESC.
Despite external constraints, the overall increase in revenue and reduction in transmission and distribution (T&D) losses resulted in a 'significant' improvement to the company's profitability, and the net loss for the period reduced from Rs 15 billion in FY09 to Rs 14 billion in FY10. It also contributed in achieving improvement in the EBIT ratio which was negative at 7.61 percent in FY10 compared to negative 11.4 percent in FY09.
Debt management Loans have been secured for expansion purposes, so future returns are expected by the company. The debt of the company fell from Rs 45 billion in FY09 to Rs 39 billion in FY10 as a result of the conversion of the loan from the Asian Development Bank (ADB) and the International Finance Corporation (IFC) to equity. The interest expense increased by 22 percent year-on-year since FY09 and stood at Rs 6 billion in FY10.
Liquidity The short-term capital status of the company improved in FY09 with fresh equity from the new management and the injection of capital to increase the company assets. This led to an improvement in the current ratio, which increased from 0.53 in FY08 to 0.81 in FY09.
Operational efficiency The company has experienced a decline in its operational efficiency and resource utilisation. This can be seen by the fixed asset turnover ratio, which fell from 1.04 in FY09 to 0.73 in FY10, a massive decline of 30 percent.
Market value The company continues to remain in losses on net basis. However, with the advent of the experienced and efficient management, there was a gradual improvement seen in the net earnings of the company, resulting in the improvement in the earnings per share from a negative Rs 1.18 in FY09 to a negative Re0.74 in FY10.
FUTURE PROSPECTS The company has shown a marked improvement since the change in the management but requires more time to achieve its goals.
Given the high price of furnace oil and the shortage of gas in Pakistan, KESC is developing a fuel replacement project whereby initially two out of six units at BQPS 1 will be converted to coal fired boiler as coal is 60 percent cheaper than furnace oil. Although international coal is being used in the initial phase for boiler designs, local coal options will later be explored for blending. The first unit is expected to be operational on coal after 20 months of signing the final agreement with the EPC contractor.
KESC's 1000 MW portfolio of gas based power plants (both current and under construction) combined with shortage of natural gas in the country, has made LNG import essential to ensure business sustainability.
KESC is in discussion with various terminal operators for this project. Depending upon the mode of contract and pricing, LNG may also serve as a cheaper alternative to RFO for its dual fired assets. For LNG supply, KESC is in talks with multiple LNG suppliers. The project is expected to be completed by 2013-14 and will increase natural gas supply to KESC by 200 MMCFD.
The company hopes to get strategic investment and continuous support from the principal shareholder and the GOP will enable KESC to finally realise its goal of implementing an ambitious turnaround and growth plan, in accordance with the original privatisation plan.