The country's largest independent power producer, Kot Addu Power Company Limited (KSE: Kapco) is chiefly 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 is a significant contributor to the national exchequer, being the only IPP in the country that pays income tax at the corporate level. The organisation holds enormous significance as its shares are listed on all the three stock exchanges and is also a KSE-30 Index company. Its social activities include a rich portfolio of projects in the health and education sectors.
The firm is the part of a power sector which is primarily state-owned. The industry is governed under a regulatory regime, which requires IPPs to sell electricity under long-term agreements to Wapda and NTDC. The tariff agreement is the key financial instrument determining a IPPs income and profitability, and this tariff is determined by the regulatory authority Nepra. The combination of these two factors implies that the IPPs ability to convert fuel to energy at an efficiency level equal to or below the stipulated level is the sole controllable determinant of profitability for a company.
Actually, for Kot Addu Power Company (KAPCO) things started improving from the third quarter of FY14. While profitability in 1HFY14 was largely affected by repairs and overhaul of its gas turbines, plant availability improved in 3QFY14, which resulted in better load factors, and thus a 20 percent year-on-year increase in quarter's earnings.
Likewise, Kapco's 4QFY14 has been even better in terms of its core operations. The IPP's earnings for the last quarter of FY14 hopped by 48 percent year-on-year, specifically due to better gas availability. This improvement in gas supply came from about 45mmcfd of gas diversion from the fertilizer sector, which resulted in augmented plant utilisation, better fuel efficiency, and lesser liquidated damages.
Overall, the financial performance for FY14 has three key definers. First, Kapco's revenue improvement of 16 percent year-on-year due to greater generation and higher overall rupee depreciation supported the earnings for the year. Second, the gross margins took a big slide due to high overall repair and overhaul costs. And third, circular debt settlement resulted in reduced penal income for the firm, which resulted in a 29 percent glide in other income, a significant provider to the bottom line normally. However, this was also offset by a weightily decrease in finance cost, which is also a result of the debt resolution.
In FY14, the firm sold 6,479 GWh of electricity to its customer (WAPDA). This generation represents a cumulative load factor of over 55 percent; overall commercial availability of over 94 percent; and thermal efficiency of over 43 percent.
With the financial performance of the IPP for 1QFY15, KAPCO's flexibility is even more evident. KAPCO's plant availability improved during the first three months of FY15 compared to 1QFY14 due to improving load factor from 65 percent to 77 percent on average. Also the availability of gas has increased for the IPP. This resulted in and overall increase in the firm's revenues by 18 percent year-on-year and enhancement in gross margins ominously by 2.4 percentage points.
Along with 2.5 times surge in other income, the firms operating margins also jumped by almost five percentage points , which was due to once again rising penal income. However, KAPCO's profits were dented by 2.3 times increase in finance cost, which was due to the growing financing needs in the wake of piling up of receivables due to the circular debt menace.

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Kot Addu Power Company Limited
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                                FY12    FY13     FY14
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Profitability
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Gross margin                   11.2%    13.7%   10.8%
Operating margin               18.3%    19.4%   14.0%
Net margin                      6.0%     7.5%    6.8%
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Liquidity
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Current ratio                  1.20     1.47     1.25
cash to current liabilities     0.5%     1.2%    5.3%
Debt to equity                 18.0%     9.1%    5.5%
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Activity & Investment
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Fixed asset turnover           5.50     5.71     7.19
Total asset turnover           1.01     1.57     1.19
EPS (Rs per share)             6.90     8.35     8.78
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