Kot Addu Power Company Limited (Kapco) was incorporated in April 1996, as a public limited company under the Companies Ordinance, 1984 with the objective of acquiring the power plant from Water and Power Development Authority (Wapda). Wapda built the Kot Addu Power Plant in five phases between 1985 and 1996.
The company was located in Kot Addu, Punjab. The principal activities of the company include the ownership, operation and maintenance of the power plant. Kapco was privatised on June 27, 1996, and the management was transferred to National Power Kot Addu Limited (NPKAL), a subsidiary of National Power (now International Power) of the United Kingdom. NPKAL presently has 26% stake in Kapco. The other majority shareholder is Wapda with a present shareholding of 46%. Following the successful completion of sale in February 2005, through public offer by the Privatisation Commission (on behalf of Wapda), 18% of company's stock is held by the general public. On April 18, 2005 Kapco was formally listed on all the three stock exchanges of Pakistan.
Kapco is Pakistan's largest Independent Power Producer (IPP) with a capacity of 1600 MW. The power plant is a multi-fuel gas-turbine power plant with the capability of using 3 different fuels to generate electricity, namely natural gas, low sulphur furnace oil and high speed diesel to generate electricity. It is the only power plant in Pakistan with self-start ability in case of a countrywide blackout.
Over the period, the power plant generated a net output of 2514 GWh of electricity, resulting in a load factor of 84.7% with an overall commercial availability of 96.7%. The fuel mix for the dispatched output to its customer, Wapda was 75.5% gas, 24.4% low sulphur furnace oil and 0.1% high speed diesel.
Turnover for the period was Rs 10,232 million and cost of sales was Rs 7,918 million. Profit after tax for the period was Rs 1,312 million (compared to Rs 1,119 million in the corresponding period in 2006), delivering an earning per share (EPS) of Rs 1.49 per share (Rs 1.27 July to September 06).
During the period, three combustion inspections and one hot gas path inspection was carried out to the company's gas turbines as per schedule. These inspections form part of company's commitment to operate and maintain the power plant to the highest international standards in order to ensure maximum availability for company's customer.
Financial performance (FY02-FY07)
Total sales stood at Rs 37.08 billion, up from Rs 32.83 billion in the last year while cost of sales totalled at Rs 28.43 billion from over Rs 22.99 billion in the last year. The company posted 6.53 percent negative growth in its net profit during the year to Rs 4.99 billion over Rs 5.31 billion in the last year.
Analysts said profits were bound to get a hit after a 10-year tax exemption as per the "Income Tax Ordinance" granted to the company expired in June 2006. The firm is now paying a 35 percent corporate tax on its profits. Going forward, Kapco's earnings will continue to decline until the entire long-term debt is paid off.
Earnings per share (EPS) of the company decreased to Rs 5.87 in the year 2007 from Rs 6.04 a year earlier while profit before tax declined to Rs 7.68 billion from Rs 8.59 billion in the last year. The company's earnings growth was also dented by a cut in its electricity sale prices.
Kapco has posted a consistently declining trend of net profit and gross profit margins. The decline is in consequent of high base effect otherwise net income has been on a rise in absolute terms.
In 2005, net income and profit margin both increased. Depreciation of 3.4% in rupee against dollar from an average of Rs 58.5/US$ in Jul'04 to Rs 60.4/US$ in Jun'05, and increase in the US inflation (CPI), which stood at 3.01% on average in FY'05 compared to 2.19% on average in FY04 were main contributors to growth. In FY06 Kapco declared Rs 5.3 billion PAT as compared to Rs 8.1 billion in FY05, a decline of 34.5%. The profit before tax grew by 5.8%; however, the application of the income tax of 35.0% on expiration of the exemption period available to Kapco caused a major decline in earnings.
ROA and ROE have also declined after remaining historically high and the decline in their trends can be attributed to the rise in tax amount and a corresponding decrease in net income and retained earnings of Kapco. Nevertheless, KAPCO still fared well than the industry as shown by its greater-than-average ROA and ROE figures.
The liquidity position has been erratic since past six years. The increasing trend in the later years can be attributed to the increasing current assets owing to better inventory position and high cash and bank balances.
Kapco's trade payables, accrued and other accrued liabilities increased due to which the current liability portion increased significantly in FY07. This coupled with an addition of finances under mark-up arrangements (secured) further caused the current liabilities to rise by more than double thus causing both current and quick ratios of Kapco to decline in FY07.
On the contrary, an assessment of the quick ratio substantiated the commendable liquidity position that Kapco enjoys as compared to its competitors. Even though inventory position has risen over the years yet, the increase is in line with the soaring demand for power and thus Kapco has been able to capitalise on this factor.
Asset management ratios of Kapco showed a positive remark till 2006 but the situation deteriorated in FY07, as evident from their trends. Rising demand of power coupled with lower efficiency in maintaining the inventory has given rise to increasing operating cycle trend. DSO and inventory turnover (days) has also increased as a result.
An almost three-fold increase in trade payables, prompts towards Kapco's easy credit policy, thus more number of days are required to recover its receivables. Although Kapco is trying its best to curtail its operating cycle considerably through better marketing and efficiency yet other players of the industry are still better off and Kapco has been unable to catch up with the decreasing industry trend.
Sales and net income of the company have augmented over the years, resulting in higher total asset turnover ratio. In consequent of the rising power demand and better incentives in the Budget'08, the company will be able to capitalise on its efficiency in augmenting its overall asset management ability. Sales-to-equity ratio has also posted an increasing trend mainly on account of high sales revenue backed by higher demand for electricity. Lately, it is well above the industry average trend.
Higher long-term debt-to-equity ratios signify company's greater reliance on debt for financing. Till 2006, both equity and debt contributed equally, yet the debt composition was skewed towards the long-term loans. However in FY07 more than 50% of the assets are debt financed which is a higher percentage than that of other players. Thus, Kapco has a relatively higher leverage.
Furthermore, as evident from long term debt to equity ratio, the debt composition changed and became more skewed towards current liabilities which increased by more than double as compared to long term debts which registered a decline by 7%.
Interest paying ability had been increasing since 2003, since Kapco's reliance on debt financing has been decreasing over the years till 2005. This along with the timely payment of long-term loans, has kept the interest expenses on a lower side. Consequently, TIE ratio had increased. However, post 2006, tight Monetary policy (Jan'07-June'07) gave rise to higher interest payments and added to the cost of borrowing. To mitigate any negative impact, Kapco should rely more on equity financing rather than debt financing like the other players did.
The book value per share has consistently risen since 2003 because of an increasing trend of stockholder equity. It decreased slightly in 2006 and 2007 owing to a decline in retained earnings mainly followed by the expiry of ten-year corporate tax. EPS has also been increasing until recently in consequent of the above mentioned reason. Despite the decline in EPS, Kapco maintained an increasing trend in dividend per share (though it declined slightly in FY07). The market value ratios have been praiseworthy when compared with other power generating units and are well above the industry average figures.
FUTURE OUTLOOK:
The impact of the budget 07-08 will be positive in the long term since the government has announced mega projects namely construction of Neelum Jehlum dam, Bhasha Diamer dam. Some of the mega projects are currently underway. The successful completion of these mega projects will help to overcome the power shortages. Out of the total PSDP allocation, power sector will get Rs 84 billion. An amount of Rs 73 billion outside the PSDP has also been allocated to the sector. Moreover, reduction of customs duty from 40% to 35% has been proposed on industrial diesel power generating units.
New power policy will be announced soon. This will have an augmented effect on the company's financials. Plans have also been made to accelerate the exploration of indigenous coal while the import of coal in the short run for the power sector will be encouraged. An allocation of Rs 60 billion including foreign aid of Rs 30 billion has been made for the power sector for 2007-08.
The dematerialization of 26% shares held by International Power (IP) formerly known as NPKAL will raise temporary management issues for the company and in case the IP left Kapco pursuant to sell 36 percent of its equity, Wapda would not be able to retain its control over Kapco.
Following approval of the feasibility study submitted by the company for expanding its generation capacity by approximately 450 MWs, the company is progressing towards filing a tariff petition with the National Electric Power Regulatory Authority (Nepra). To facilitate this, the company entered into an agreement with Fichtner GmbH & Co KG of Stuttgart, Germany ("Fichtner") for the provision of Owner's Engineer services to the company. Approval of the feasibility study and appointment of Fichtner as Owner's Engineer is no assurance/guarantee at this stage that the Company will increase its generation capacity