The history of Karachi Electric Supply Corporation dates back to 1913. It generates and supplies electric power to the largest metropolis of the country, Karachi. The company is the oldest and was established even before independence. It was nationalised in 1952 before it was privatised on November 29, 2005. It is listed on all the three exchanges.
The company provides electricity to over two million customers in not only Karachi but also Dhabeji and Gharo in Sindh and Hub, Uthal, Vindhar and bela in Balochistan. KESC is the only vertically integrated power utility in the country that deals with generation, transmission and distribution of electricity. It covers an area of 6,000 square kilometers, supplying electricity to all the industrial, commercial, agricultural and residential areas.
FY12 OPERATIONAL HIGHLIGHTS Improving efficiency and operational performance through the restructuring of the existing and new generation, transmission and distribution network was the cornerstone of the turnaround much talked about first in FY08.
To date, the improvement in generation capacity of KESC has been 49 percent where 1,010 MW has been added. On the whole, the average fleet efficiency during FY12 improved by 80 bps YoY to 34.3 percent. Moreover, the power supplying company also completed the installation of its new 560MW power station with site efficiency of 45.5 percent.
Transmission and distribution (T&D) losses which have been a key concern for the company for long have been on a gradual declining trajectory to stand at 17 year's lowest for FY12. During the fiscal year 2012, KESC's T&D losses were 29.7 percent, compared to 32.2 percent in FY11 fuelled by the recovery and T&D loss reduction drive launched by the company.
Bill collection for KESC for FY12 closed at 88.7 percent, inching up by almost three percent during the year. A big achievement was the improvement in collection to 95 percent from areas consuming more than two thirds of electricity.
Load management has also been better and more systematic than the company counterparts in the country. Where 50 percent are completely off the hook, loadshedding is exempted for Sundays throughout the city. A total of 61 grids were added on the DHA transmission network, 25,000 new connections were given out during FY12 amounting to an additional load of 200 MW, and 112 kilometres of lines were added to the distribution network.
PROFITABILITY Eventually entering in the green zone, the company witnessed a turnaround in profitability. Due to 57 percent hike in tariff adjustment revenues, the top line of the company during FY12 inflated by 25 percent YoY.
The company has been in losses for years with negative margins. The gross margins have been plagued by exorbitant cost of fuel and oil, purchases of electricity from NTDC, IPPs and Karachi Nuclear Power Plant in addition to T&D losses, while customer service expenditure and financial charges took a toll on the operational and net margins.
However, growth in the energy served and the revenue generated shined on the bottom line of KESC this time. Major gyration to profitability however, was brought by a decline in the transmission and distribution losses, and a comparatively moderate increase in cost of fuel and oil during from FY11 to FY12 compared to that of FY10-FY11.
With 29 percent T&D losses recorded for FY12, the company aims at lowering these losses further by 2.5 percentage points for FY13 which according to the analysts will result in an improvement in the earnings by almost Rs 1.7 billion. The earnings also received a major boost from Rs 1.06 billion reversal of mark-up on security deposits and a single gain of Rs 4.72 billion in tariff adjustment during the last quarter for FY12.
FUEL MIX Due to the shortage of the non-renewable natural gas in the country, the fuel mix of KESC which once relied heavily on natural gas has been skewed towards the consumption of more expensive furnace oil. However, during FY12, the gas supply to KESC eased a bit from 153mmcfd in FY11 to 169mmcfd for FY12.
The cost of FO is almost 3.5 times of gas resulting in major tariff hikes. Due to a constrained gas supply against allocated levels and increase in fuel prices including that of furnace oil, the company's cost included an average of approximately Rs 10 billion annually for three years, incurred on furnace oil purchases.
LIQUIDITY AND DEBT POSITION Even with 388 million dollars equity injections since FY08, KESC remains highly leveraged for which the company has under taken long-term financing from both the local and international lenders. A factor that will somehow shape the company's debt structure is conversion of ADB and IFC loan into debt, deadline for which is the end of 2012.
With regard to the circular debt, the receivables of the company have been escalating amidst the deteriorating situation. On June 30, FY12 the receivables of the company amounted to Rs 44.8 billion from the federal government and Rs 25.37 billion from the provincial government. On the other hand, the major payables include payments to SSGC, PSO and NTDC to the tune of Rs 65.93 billion.
COUNTLESS THREATS In spite of increase in the energy served by the company, the supply demand gap persists due to heightened segmented loadshedding and fuel constraints. The company has had an adverse fuel mix skewed towards furnace oil.
Meanwhile the slowing down of the economy and increase in average tariff by 47 percent are described as factors negatively impacting the customer propensity to pay in the analysts briefing.
While the company has been successful in its collections in areas consuming two-thirds of energy served, the security situation hampers its progress in the remaining areas consuming one-third of energy. These areas have T&D loss incidence of over 50 percent.
WHAT LIES AHEAD? With limelight on the energy sector, the resolving of the circular debt is the only ultimate way out. There is no proxy for the grave situation. In a more realistic approach, the easing of the circular debt could release some tension in the system.
On the company level, an important concern is the ability of the company to continue standing in the green zone. KESC has been keen on increasing the focus on distribution, recovery, billing, loss reduction and greater accountability. The company also plans the roll out of more IBCs, commencement of bio-waste to energy project Landhi, import LNG and continue with capacity enhancements.
KESC also launched Pakistan's first utility sector bond: KESC Azm TFC worth Rs 2 billion fully subscribed. The capital raised through this bond float is to be used for financing the company's working capital requirements. Besides, the company also plans to pursue coal conversion projects where it has signed a joint agreement with Oracle Coalfield for Bin Qasim coal conversion project. Like wise the dialogue with Sindh Engro Coal Mining Company on setting up a power plant on Thar Coal is also under way.
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Karachi Electicity Supply Corporation
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FY08 FY09 FY10 FY11 FY12
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PROFITABILITY
Gross margin -16% -8% -4% 0% 10%
Net margin -24% -18% -14% -7% 2%
ROCE -67% -45% -24% -13% 3%
LIQUIDITY
Current ratio 0.5 0.8 0.7 0.6 0.7
Quick ratio 0.3 0.3 0.3 0.3 0.4
Cash to current liabilities 0.1 0.0 0.0 0.0 0.0
ACTIVITY/ TURNOVER
Inventory turnover days 25 21 18 17 17
Debtor turnover days 64 92 111 109 133
Creditor turnover days 123 110 118 161 190
CAPITAL STRUCTURE
Debt to Equity Ratio 0.9 1.0 0.8 0.9 0.8
Interest Cover Ratio -7.3 -1.8 -1.2 -1.0 1.3
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