The country's largest independent power producer, Kot Addu Power Company Limited (KSE: KAPCO) is a significant contributor to the national exchequer. The organisation holds enormous significance as its shares are listed on all the three stock exchanges and is also a KSE-30 Index company. The IPP is essentially 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 Pakistan's 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 is a multi-fuel gas-turbine power plant with the capability of using three different fuels like gas furnace oil and diesel to generate electricity. As per the company information, the turbines are divided into 3 energy blocks with each block having a combination of gas and steam turbines. The plant's combined cycle technology helps 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 turbine. This results in fuel cost efficiency and minimum wastage. KAPCO's social activities include a rich portfolio of projects in the health and education sectors.
The key controllable factor and hence the determinant of profitability for the IPP 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.
FY14 snapshot Better gas supply to the plant was the key highlight for FY14, and hence some stability in the performance for KAPCO. This improvement in gas supply came from about 45mmcfd of gas diversion from the fertiliser sector, which resulted in augmented plant utilisation, better fuel efficiency, and lesser liquidated damages.
However, FY14 was filled with overhauls and repairs for the major independent power producers 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 from the third quarter of FY14. While profitability in 1HFY14 was largely affected by repairs and overhaul of its gas turbines, plant availability was improved in 3QFY14 which resulted in better load factors, and thus a 20 percent year-on-year increase in quarter's earnings. Similarly, fourth quarter's earnings sprung by 48 percent year-on-year, specifically due to better gas availability.
Overall, FY14 profitability for the IPP had three key definers; first was the revenue growth due to greater generation and higher rupee depreciation. Secondly, the gross margins were held back by repair and maintenance costs. And finally, circular debt settlement resulted in reduced penal income for the firm
FINANCIAL PERFORMANCE FY15 KAPCO witnessed steady earnings amid privatisation talks in FY15. And this is because the fiscal year remained silent on overhauls and repairs, compared to extensive O&M expenses for the independent Power Producers in FY14.
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 did gross margins due to lower input cost in low oil price environment.
KAPCO's earnings were also supported by a 50 percent year-on-year increase in other income, which comprises of peal income from overdue receivables. Earnings were affected by higher finance cost. The IPP sold 6,934GWh of electricity to its customer during the year, which is seven percent year-on-year higher than FY14. This generation represents a cumulative load factor of 59 percent with overall commercial availability of 94.1 percent and thermal efficiency of 44.2 percent.
Financial performance 1QFY16 While the fiscal year 2015 remained silent on repair and overhauls, FY16 is being anticipated as a year the IPP will incur some related costs. The firm saw a fall in its revenues by 38 percent year-on-year in 1QFY16 due to low oil prices as the IPP's fuel mix is exceedingly tilted towards furnace oil. However, lower input cost resulted in the firm observing an ample increase in its gross margins.
The decline in revenues was slightly compensated by development in the indexation factor with the exchange rate impact. However, the drop in load factor during the first three months of FY16 could be credited to the increased LNG-based power generation, and thus lower furnace oil consumption. The IPP's earnings were also spoiled by the decrease in other income. At the same time, the improved liquidity position and hence a decrease in finance cost positively affected the net margins.
Outlook The firm continues face liquidated damages due to failure to dispatch electricity because of shortage of fuel and oil caused by the payment defaults.
With six years remaining in KAPCO's PPA, an extension of the Power Purchase Agreement, respite in liquidity damages, development of its expansion projects, and the IPPs privatisation are key factors that will determine how growth takes its route in the organisation.
The firm is considering its expansion plan for 660MW coal based power project in Punjab which is expected to cost around $1 billion. While the feasibility study is still ongoing, there is no assertion at the moment about the final decision.
=========================================================
Kot Addu Power Company Limited
=========================================================
FY12 FY13 FY14 FY15
=========================================================
Profitability
---------------------------------------------------------
Gross margin 11.2% 13.7% 10.8% 14.9%
Operating margin 18.3% 19.4% 14.0% 20.7%
Net margin 6.0% 7.5% 6.8% 9.7%
---------------------------------------------------------
Liquidity
---------------------------------------------------------
Current ratio 1.20 1.47 1.25 1.30
cash to current liabilities 0.5% 1.2% 5.3% 1.1%
Debt to equity 18.0% 9.1% 5.5% 3.1%
---------------------------------------------------------
Activity & Investment
---------------------------------------------------------
Fixed asset turnover 5.50 5.71 7.19 7.23
Total asset turnover 1.01 1.57 1.19 1.05
EPS (Rs per share) 6.90 8.35 8.78 9.78
=========================================================