Kot Addu Power Company Limited

Kot Addu Power Company Limited (PSX: KAPCO) is the country's largest independent power producer, and a significant contributor to the national exchequer. The IPP is involved in the ownership, operation and maintenance of a 1,600 MW nameplate capacity gas, furnace oil and diesel fired power station at Kot Addu in the province of Punjab, and to sell the electrical energy produced to its single customer, the Pakistan Water and Power Development Authority (WAPDA).
KAPCO's power plant is the largest combined cycle power plant, which comprises of 10 multi-fuel fired gas turbines and 5 steam turbines installed in 5 phases between 1985 and 1997. The plant's combined cycle technology enables it to use the waste heat from the gas turbine exhaust to produce steam in the heat recovery steam generator, which in turn is used to run the steam turbines. It also has the ability to generate electricity for itself in case of a country wide blackout.
The key controllable factor and hence the determinant of profitability for KAPCO is the ability to convert fuel to energy at an efficiency level equal to or below the stipulated level as the firm operates in a power sector that governed under a regulatory regime which requires IPPs to sell electricity under long-term agreements to WAPDA and NTDC; the tariff agreement, which is a key financial instrument determining income and profitability, is determined by the regulator NEPRA.
Shareholding pattern and share price
Around 46 percent of the firm is held by the associated companies, largely constituting of WAPDA. Banks and financial institutions like DFIs and NBFIs have around 26 percent of the company's shareholding. The next big chunk of 13.67 percent is held by the local public, whereas foreign companies have around three percent.
KAPCO's share price has been underperforming the benchmark index as well as power generation and distribution sector, which could most likely be due to lower earnings for FY16. Cash flows of IPPs also remain at risk, though HUBCO and KAPCO are better off when it comes to fuel supply guarantees. Moreover, the growth in KAPCO hinges on some investments that are still to roll out. Moreover, the share prices have remained lukewarm due privatisation delay, IPPs liquidity damages, and any uncertainty regarding upcoming maturity of its Power Purchase Agreement (PPA) in 2021.
Past performance
In FY14, KAPCO witnessed better gas supply that resulted in augmented plant utilization, better fuel efficiency, and lesser liquidated damages. However, FY14 was filled with overhauls and repairs for the most IPPs including KAPCO. And thus the profitability that picked up right after the settlement of circular debt, remained stunted in fiscal year 2014. For KAPCO, things started to turn around towards the end of FY14. Overall, FY14 profitability for the IPP was affected by three factors; first was the revenue growth due to greater generation and higher rupee depreciation. Second was the gross margin held back by repair and maintenance costs. And finally, circular debt settlement that resulted in reduced penal income for the firm
Despite better availability and improved load factors, KAPCO's revenues witnessed a decline of 10 percent year-on-year in FY15, which was due to low oil prices. The firm's fuel mix is highly tilted towards furnace oil, which observed a diminishing trend to falling crude oil prices. Gross profits improved and so did gross margins due to lower input cost in low oil price environment. Earnings were also affected by higher finance cost.
Financial performance FY16
The financial performance of the IPP remained subdued in the fiscal year 2016 with earnings declining by seven percent year-on-year. In FY16, the company's revenues fell by 36.76 percent year-on-year from Rs 101.48 billion to Rs 64.18 billion. This along with an increase in selling, general and administrative costs contributed to a reduction in net income from Rs 9.80 billion to Rs 9.07 billion, a 7.43 percent decrease.
Besides lower load factors, other income that largely constitutes penal income (as payments from WAPDA) dented the bottom-line as well with 36 percent year-on-year decline.
During the year, the company sold 6,583 GWh of electricity, which represents a cumulative load factor of 55.8 percent - overall commercial availability of 94.6 percent; and thermal efficiency of 44 percent as per the Director's Report. During the year, three major overhauls were completed; 15 combustion inspections and two hot gas path inspections were made.
The power purchaser (WAPDA) continues to make payment defaults; on June 30, 2016, the overdue receivables were Rs 58,646 million. Hence, the payables of the company to PSO for fuel oil supplies on June 30, 2016 were Rs 671 million. The company also continues to receive liquidated damages invoices from WAPDA like other IPPs.
KAPCO 1HFY17
The financial performance KAPCO took a beating in the second quarter of FY17, which resulted in overall sluggish bottom-line for 1HFY17 vis-à-vis 1HFY16. Sales declined by 22 percent year-on-year in 2QFY17 and by four percent year-on-year in 1HFY17. Gross profit was lower by 20 percent in the 2Q due to lower than estimated efficiency levels or higher than estimated maintenance charges. Also, net profit for 1HFY17 was restricted by 14.6 percent higher finance cost as short term borrowing increased. Increase in penal income supported the bottom-line in the first six months of FY17.
Outlook
On the power company's privatisation, the process has hit a snag, the process picked up slightly when the Privatisation Commission (PC) approved Dubai Islamic Bank-led consortium as financial advisor for strategic sale of the government's remaining stake. However, liquidity damages amid other factors have been creating hurdles.
Also, what has made investors cagey is the government's decision to scrap power projects based on imported fuel; KAPCO was setting up a 660 MW coal fired plant in Punjab.

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Pattern of Shareholding

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Category                              Percentage

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Director, CEO, Spouse & Children           0.00%

Associated Companies                      45.73%

Banks, DFIs, NBFIs                        26.10%

Insurance Companies                        2.61%

Mutual Funds                               3.00%

Public Sector Companies                    1.49%

General Public - Local                    13.67%

General Public - Foreign                   0.97%

Others                                     1.53%

Modarbas                                   0.00%

Foreign Companies                          3.04%

Approved Funds                             1.87%

Total                                    100.00%

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Source: Company Website

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KAPCO - Financial Ratios

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Profitability                  FY12     FY13     FY14     FY15     FY16

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Gross margin                  11.2%    13.7%    10.8%    14.9%    20.9%

Operating margin              18.3%    19.4%    14.0%    20.7%    26.4%

Net margin                     6.0%     7.5%     6.8%     9.7%    14.1%

Liquidity

Current ratio                  1.20     1.47     1.25     1.30     1.36

cash to current liabilities    0.5%     1.2%     5.3%     1.1%     1.0%

Debt to equity                18.0%     9.1%     5.5%     3.1%     1.2%

Activity & Investment

Fixed asset turnover           5.50     5.71     7.19     7.23     5.08

Total asset turnover           1.01     1.57     1.19     1.05   166.18

EPS (Rs per share)              6.9     8.35     8.78    11.13    10.31

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