Kot Addu Power Company Limited (PSX: KAPCO) is the country's largest combined cycle power plant and one of the oldest independent power producers. The IPP is involved in the ownership, operation and maintenance of a 1,600 MW nameplate capacity power plant that is located at Kot Addu. KAPCO is a multi-fuel gas-turbine power plant that can run on gas, FO and diesel to generate electricity.
Shareholding pattern
KAPCO's only customer and the largest shareholder (holding around 40 percent of the shares) is Water and Power Development Authority (WAPDA). KAPCO was built by WAPDA in five phases between 1985 and in 1996; it was incorporated as a public limited company under the Companies Ordinance, 1984, and in 1996 it was privatised. At the time of privatisation and following privatisation, WAPDA divested 36 percent of its shareholding in the company to the strategic investor. In 2013, the strategic investor sold its entire shareholding in the company to local corporate entities and individuals. The illustration shows other shareholders in the company's stock.
Historical performance
KAPCO along with other power sector companies benefited from the one-time payment made for the circular debt by the previous government. However, the profitability that picked up right after the circular debt payment in 2013 remained short in FY14 as the year saw some major overhauls and repairs. The next fiscal year, FY15 was marked with lower oil prices, and hence, KAPCO's revenues slipped again FY15. However, improved gross margins were due to lower input cost.
In FY16, the power sector performance remained sluggish; KAPCO's revenues fell by over 36 percent year-on-year, and earnings declining by seven percent year-on-year due to higher selling expenses, and higher operations and maintenance costs.
KAPCO's financial performance in FY17 was better with revenue growth of over 28 percent, year-on-year, which came from improvement in generation levels in a rising input cost environment. A prominent factor in FY17 was the decrease in the IPP's consumption of furnace oil due to the availability of RLNG to the power plant. During the fiscal year, the furnace oil prices were up by around 28 percent year-on-year, whereas RLNG prices were higher by around 22 percent. In FY17, KAPCO's profit after tax grew by 4 percent, year-on-year. Despite higher sales, disproportionate increase in cost of sales suppressed gross margins, while net margins also took from higher finance cost and other operating expenses. On the other hand, lower administrative expenses and higher other income (penal income) supported the bottom-line.
KAPCO FY18 and beyond
KAPCO's financial performance for FY18 was an improvement. The company's revenues increased by over 12 percent, year-on-year, while the earnings were also up by the over 12 percent. Net output of power, which is the electricity sold by the IPP stood at 7,473GWh, which was only up by a percent, on a year-on-year basis. However, higher prices played the role in lifting the revenues.
At the same time, the higher cost of fuel resulted in higher cost of sales as well, which along loss of efficiency despite turbine overhauls pulled down the company's gross margins in FY18. However, a significant jump in other income head pulled up net earnings. As per the notes to the annual accounts, the jump in other income came primarily from "true-up income" along with interest on late payment from WAPDA. As per the Annual report, this extraordinary item represents income resulting from change in US Dollar - PKR exchange rate exceeding the threshold defined in PPA, compared to the rates used for indexation calculation of relevant CPP invoices.
The firm's performance in 1QFY19 was even better in terms of profitability. The top line touted a growth of around 46 percent, while the bottom-line grew by over 42 percent, year-on-year. This was due to better output that stood at 2,065GWh, up by 9 percent versus 1QFY18; improved load factors from 63.8 percent in 1QFY18 to 69.5 percent in 1QFY19; and an overall commercial availability of 96.8 percent along with increase in other income due currency depreciation.
Outlook
FY18 marked a significant move in the power sector where RFO based power plants were closed by the government. The instability regarding furnace oil still persists; and the government has finally banned FO imports, and has given refineries an ultimatum to upgrade; meanwhile, the OMCs and the power sector players are being made to use local FO production that started to pile up as imports of the expensive fuel continued unabated.
KAPCO's efficiency has consistently been around 43 percent (see illustration), which has allowed it to be among the top ten positions in the NTDC's merit order. Since KAPCO has a multi-fuel plant, it was able to shift from furnace oil to RLNG. Today RLNG and gas makes up a larger portion of the company's fuel mix as compared to FO. Also rupee depreciation has been beneficial for the company.
However, key risks for the IPP include the burgeoning circular debt, though some respite might be in sight as the government mulls to clear Rs200 billion. As per its latest quarterly report (1QFY19), the receivables from the power purchaser continue to mount, standing at Rs130,107 million as on September 30, 2019. The company is also fighting a case against the liquidated damages of Rs27 billion by the power purchaser. Also the company's Power Purchase Agreement is expiring in 2021, and previously there has been some lack of clarity regarding the renewal of the PPA.
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Kot Addu Power Company Limited-Pattern of Shareholding
Categories of Shareholders as on September 30, 2018
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Particulars Percentage
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DIRECTORS, CEO, SPOUSE & CHILDREN 0.43
ASSOCIATED COMPANIES 45.73
BANKS, DFI & NBFI 26.54
INSURANCE COMPANIES 2.55
MUTUAL FUNDS 0.88
GENERAL PUBLIC (LOCAL) 13.68
GENERAL PUBLIC (FOREIGN) 2.55
OTHERS 1.62
FOREIGN COMPANIES 4.15
APPROVED FUND 1.88
Total 100.00
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Source: Company Accounts
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KAPCO-Financial Ratios
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Profitability FY12 FY13 FY14 FY15 FY16 FY17 FY18
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Gross margin 11.2% 13.7% 10.8% 14.9% 20.9% 17.3% 14.6%
Operating margin 18.3% 19.4% 14.0% 20.7% 26.4% 22.6% 23.9%
Net margin 6.0% 7.5% 6.8% 9.7% 14.1% 11.5% 11.6%
Liquidity
Current ratio 1.20 1.47 1.25 1.30 1.36 1.29 1.29
cash to current liabilities 0.5% 1.2% 5.3% 1.1% 1.0% 0.8% 0.7%
Debt to equity 18.0% 9.1% 5.5% 3.1% 1.2% 0.0% 0.0%
Activity & Investment
Fixed asset turnover 5.50 5.71 7.19 7.23 5.08 7.57 10.73
Total asset turnover 1.01 1.57 1.19 1.05 166.18 0.71 0.66
EPS (Rs per share) 6.9 8.35 8.78 11.13 10.31 10.73 12.06
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Source: Company Account
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KAPCO 1QFY19 Performance
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Rs(mn) 1QFY19 1QFY18 YoY
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Sales 31,595 21,571 46%
Cost of sales 27,978 18,127 54%
Gross profit 3,617 3,443 5%
Administrative expenses 177 128 39%
Other income 3,073 1,399 120%
Profit from operations 6,513 4,714 38%
Finance cost 2,099 1,598 31%
Profit after tax 3,116 2,181 43%
EPS (Rs/share) 3.54 2.48 43%
Gross margin 11.4% 16.0%
Operating margin 20.6% 21.9%
Net margin 9.9% 10.1%
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Source: Company accounts
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