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The KESC was established on 13th September 1913 under the Indian Companies Act 1882. The government of Pakistan acquired the majority shareholding in 1952, thereby taken-over the control of the company. The Ministry of Water and Power looks the affairs of the company at federal level.
The company deals in generation, transmission and distribution of electric energy to industrial, commercial, agricultural and residential consumers. The company was privatized in November 2005 that transferred 73% of the shares of the Government of Pakistan to new investors and passed the management control to the new owner viz KES Power & others.
KES Power Limited is a company incorporated in the Cayman Islands and now holds 71.5% stakes in KESC. The privatization has brought down the government's share to 25.65%. New investors include KES Power Limited, Hassan Associates (Private) Limited and Premier Mercantile Services (Private) Limited. The new management appointed Siemens Pakistan Engineering as the Operations and Management (O&M) Contractor for the operation and management of the company.
ANALYSIS OF FINANCIAL PERFORMANCE: As evident from the graph, the last few years have not been profitable for KESC. The company has been suffering from gross and net losses for the last decade and this trend has continued even in the post privatization period.
The six months of 2007 were marred by the same trend. The company faced a shortage of gas supply from Wapda this period due to which KESC resorted to the use of furnace oil. Though the units of furnace oil purchase were less in this period as compared to the same period last year, the hike in the furnace oil price inflated the oil bill of the company.
The monetary output of units witnessed a slight increase due to a higher tariff rate however, this being offset by the fuel bill. Hence, the company recorded gross and net losses this year as well. Transmission and distribution expenses saw an increase that might be attributed as maintenance expenditures for the already decaying network.
KESC's distribution system is very poor while there was no progress in generation and recurring faults have become rather a nuisance for not only the people but also the KESC staff. Moreover, minimal investment if any has been made in the distribution system since privatization.
It is an important fact to mention here that the fuel cost, power purchases, financial costs, and operation and maintenance expenses account for about 85-90% of the total expenses of the company. The liquidity profile of the company does not portray a favourable picture. The company is facing the danger of running out of liquidity.
While the short-term borrowings have recorded a slight decrease, trade and other payables of the company have increased by almost forty five percent in six months ending December 2007. The company's bad debts continue to soar higher due to which indicate either a poor credit policy or a poor collection effort.
For this reason, the company's cash balances have almost steadily declined. In addition, the provisions required for the bad debts and provisions against slow moving and obsolete stock have increased. It is needed the company must improve its transmission and distribution network, minimize losses and theft. In addition, the projects that have been undertaken with respect to the construction of plants need to be expedited.
The current liabilities on the other hand maintained an upward trend, the main portion constituted by trade payables of which the payables accruing to the fuel and power suppliers made up the majority. Due to late receivables collection, the company also incurred many surcharges for delaying payment to the creditors.
The company has its short-term investments in only term deposit receipts on floating interest rate. It would be preferable if the company invests in other short-term assets such as government securities or assets that have a low fixed rate to avoid any uncertainty due to fluctuating interest rates eyeing the current situation of the company.
The current assets of the company may not be the best assets mix for it as the assets may be employed more effectively by investing in more profitable ventures and exploring short-term investment opportunities.
KESC has a relatively better record when it comes to management of inventory. The inventory turnover of the company has been maintained at almost a consistent level implying that the inventory is being turned into sales rather efficiently.
The operating cycle of the company has increased in the six months under review. The transmission and distribution system is undergoing maintenance due to which the losses in these areas have slightly reduced. This has further added to the efficient management of the KESC's stocks. Plant and machinery has been added to the 220MW Combined Cycle Power Plant at Korangi. This is further likely to improve the assets management of the company.
The total assets turnover has declined in these six months owing to increasing fixed assets, accounts receivables and loans and advances. The decline in the total asset turnover may be attributed to lower sales levels as the sales shown are only for six months and not for the entire year. Hence, such differences are expected to come in.
The high debt ratios indicate the company's greater reliance on debt financing that has made KESC more financially leveraged. This may affect the long-term growth and solvency adversely. The short-term liabilities have continued to increase with the chunk of this financing being power purchase and fuel credit constituting almost a massive 90% of total short-term financing.
Moreover, the late receivable collections have resulted in deferred payment of these liabilities adding surcharges and hence increasing amounts. The company has most of its short-term borrowings from commercial banks, that exposes it to much interest rate risk. The firm should consider widening its equity base.
The financial costs in these six months are already about 80% of the level of 2006-2007 fiscal year. The financial costs and surcharges of the company are likely to increase in the near future.
The equity of the company has continued to decline in the six months under review due to higher accumulated losses whereas the debt situation of the company is exposed to danger. The company requires diversified investments, especially short term.
FUTURE OUTLOOK: The power demand in the country is on the rise and would go up in the future. Oil has already surpassed the level of $100 and is likely to further rise in the future. Moreover, concerns over the shortage of oil and gas supplies have already gripped the industrial economy.
Increase in industrial activity, purchase of air conditioners by the domestic consumers and other electrical appliances increased the power demand, which also added to crisis facing KESC. More efficient management of the company is required to ward off further inflated fuel bills. The capacity of KESC needs to be utilized further to meet the ever-growing demand.
New power generation units are being installed at Bin Qasim and Korangi Power Plants of 560 and 192 megawatts respectively and it is hoped that the KESC is able to overcome the crisis in the next five years. Recently, the foundation of Karachi Electric Supply Corporation's (KESC) 220mw power plant has been laid that it is expected would halt shut downs by increasing the power generation of the company.
This power plant that is being set up at Korangi Thermal Power Station is part of an over $800 million three-year programme that envisages addition 780 MW generation by 2009.
Access to long-term debt to match the long-term nature of its project assets is important for the success of KESC's investment programme. For this capital expansion plan the utility will raise funds from Asian Development Bank, International Finance Corporation and local banks. 192mw of the 220mw would come online by March 2008 while remaining 28mw at end of next year.
However, the main infrastructure bottlenecks are in the transmission and distribution system, which is being improved. The power shut downs are likely to adversely affect many industries, harm production and export targets. Line losses have increased. The company is undergoing losses and is likely to do so in the near future at least if serious action and management is not undertaken.
KESC has not paid its dues to Wapda that amount to around Rs 34 billion. This is either because the KESC is unable to collect its dues or it is deliberately delaying the payments to Wapda. With the coming online of various plants we may expect the power generation to increase but this has to be complemented by an efficient distribution network.
The entire load of the power supply is on 52 grid stations as of now. Nine more grid stations are expected to be completed in a maximum of 13 months, while the power supply is also said to increase to 780 MW. Since the improvements have just started, this goal may take a long time to achieve if the projects are not expedited.
A couple of units have been shut down for good. These require replacement with a sound planning. The Government of Pakistan has announced Rs 98 billion subsidy for KESC and Wapda in the Budget FY08. This may help the company to alleviate its losses. Though the government has made such investments in KESC previously also, not much of an improvement has been seen.