Power: KOT ADDU POWER COMPANY LIMITED - Analysis of Financial Statements 2002-2010
Kot Addu Power Company Limited (KAPCO) was incorporated in Pakistan on April 25, 1996 as a public limited Company. The Company was listed on April 18, 2005 on the Karachi, Islamabad and Lahore Stock Exchanges. The principal activities of the Company are to own, operate and maintain a Multi-fuel fired power station with fifteen generating units with a nameplate capacity of 1,600 MW in Kot Addu, District Muzaffargarh (Punjab), Pakistan. The plant technology attains 43% efficiency rate and comprises of ten multi-fuel fired gas turbines, five steam turbines, and ten heat recovery steam generators. An ancillary plant includes water extraction and treatment systems, cooling towers, oil storage tanks, and fuel oil treatment plants. KAPCO has full flexibility to switch over between gas furnace oil and diesel as the fuel source for generation. Fuel switching can be carried out whilst the machines are generating and therefore the company has the ability to generate electricity on either fuel or a combination of both.
KAPCO functions through various agreements with its sole customer, Govt. of Pakistan and fuel suppliers. These agreements include power purchase agreement (PPA), gas supply agreement (GSA) & oil supply agreement (OSA). The PPA is between WAPDA and KAPCO which determines the tariff structure as well as principles of operating power plant. The PPA also includes implicit return built into the tariff provided. GSA is in between Sui Northern Gas Pipeline limited (SNGPL) and KAPCO. OSA is in between PSO and KAPCO.
Delayed payments from WAPDA and low fuel supply impacted the generation level of KAPCO's power plant in FY10. The Company sold 7,767 GWh of electricity to its customer (WAPDA) in the year compared to7,545 GWh and 8,863 GWh in 2009 and 2008 respectively. Thus, most of the increase in sales actually reflects the rising tariff.
The power sector of Pakistan continues to face circular debt problem. KAPCO's sole customer WAPDA (Water and Power Development Authority) experienced liquidity issues in 2010 as well. Trade debts increased by 58% to Rs 51.8 billion. Most of this is owed by WAPDA and any delayed payment is charged interest at SBP discount rate plus 4 percent per annum, and the debt is secured by a sovereign guarantee. On the supply side, KAPCO's suppliers Pakistan State Oil (PSO) and Sui Northern Gas Pipelines Ltd (SNGPL) also face delays in payments due to the liquidity problems of WAPDA.
Sales at KAPCO rose to Rs 85.9 billion for FY10, representing a 24% YOY increase. Since 2005 sales have increased by a cumulative total of 212%. As mentioned before, this increase was mainly due to the rising tariff. KAPCO has a pre-defined, US $-indexed tariff that builds in minimum USD linked equity returns, fuel cost immunity, inflation adjustment for variable costs, complete long term debt coverage and a sovereign guarantee on its receivables from WAPDA.
Liquidity position of KAPCO remained under threat during 2010 and slightly worsened. The current ratio fell from 1.43 in 2009 to 1.25 in 2010. This is most attributable to the sharp increase in short term borrowing over the last couple of years. Secondly the current ratio didn't fall drastically because on the current assets side trade debts increased by 58% and jumped to Rs 51,812 Million in FY10. Both of these factors represent the liquidity problem that KAPCO and other IPPs like HUBCO are facing. KAPCO had to utilize and extend its running finance facilities available from different banks to ensure that it paid its creditors. Whereas WAPDA's dues continue to rise from the last year and the company has to bear with a liquidity crunch because it's sole customer (WAPDA) is unable to clear off its obligations towards KAPCO.
Compared to HUBCO which has Current Ratio of only 1.01x, KAPCO is still able to manage its liquidity condition better. The primary reason for HUBCO to have such a decline in its Current Ratio is because of higher amount of payables to PSO compared to KAPCO.
The Company's profit before tax for FY10 was Rs 7730 Million as compared to Rs 8722.9 Million last year. The Company paid Rs 2641.4 Million in taxes for the current year and earned a profit after tax of Rs 5,089 Million which represents a decline of 10% from last year.
The company was not able to maintain its profitability compared in FY10 compared to previous years. The Gross Profit and Net Profit margins saw a decline in FY10. Gross Profit margin was reduced to 11.55% in FY10, as there was not a significant increase in Sales compared to Cost of Sales which led to a decrease in the ratio. The reason behind this is the increase in repairs and maintenance Cost which induced the overall increase. For the Net Profit Margin, it further decreased to 5.9% due to decreasing Gross Profit and continued high interest costs. KAPCO performed better than its main competitor HUBCO in this regards as its Gross and Net Profit Margins stood at only 7.71% and 5.57% respectively. The Return on Asset and Return on Equity also declined from last year due to overall declining profitability of the company and a rise in overall assets.
Inventory Turnover (days) decreased slightly to 10.74 days during FY10 compared to 11.45 days in FY09. This was primarily due to the fact that PSO was not supplying sufficient furnace oil despite the plant being available. This figure is double that of HUBCO which has an Inventory Turnover of only 5.63 days. The operating cycle increased by 26.06 days due to the increase in the day sales outstanding (DSO). DSO increased to 216.59 days because of the rise in trade debts owed by WAPDA. Still, the figures are better than those of HUBCO which an operating cycle of 247 days which raises its DSO to 241 days. The unstable and volatile trend of operating cycle during the past three years is mainly due to the liquidity problem posed by the circular debt trap. Sales-equity ratio increased to 3.82 in FY10 from 3.00 in FY09. HUBCO's Sales/Equity ratio in FY10 was 3.33x which is slightly less than KAPCO's 3.82x. This increasing trend is in continuation for the past four years and shows that KAPCO has been able to increase sales by a greater percentage as compared to the percentage increases in equity. In FY10, KAPCO's asset management ratios decreased and showed a dismal performance compared to FY09. The Total Assets Turnover decreased to 0.90x from 1.16x in FY09.
KAPCO's long-term debt stood at Rs 4.3 billion at year-end and is owed to WAPDA at 14% interest rate. The Company duly discharged its obligation under the Note Agreement through exchange of two debit and credit notes with its creditor (WAPDA) in December 2009 and June 2010 respectively of the total amount of Rs 900 Million. The long term debt to equity ratio stood at 0.19. On the other hand, the company has been relying on expensive short term borrowing from banks to fund its operations as WAPDA continues to default on its payments. At year end, the accounts receivable stood at Rs 53.9 billion, which is equivalent to 229 days of sales. This is a significant rise from last year, when the company had 187 days of sales in accounts receivable.
Total liabilities increased by 49.4% during FY10 on a YoY basis even though long-term liabilities fell by Rs 900 million. The rise in short-term finance facility utilization was the major reason for higher total liabilities. Total assets rose by 29.4% during FY10. Both debt to asset and debt to equity showed an upward trend at the end of FY10 because of higher short-term debt that KAPCO needed to pay off its suppliers and creditors these payments were not financed by KAPCO's own assets, rather by running finance lines from commercial banks, because WAPDA didn't pay off it's obligations towards KAPCO. TIE ratio rose to 2.45 in FY10 from 2.36 in FY09 because financial costs decreased compared to last year.
The firm's increased debt to asset and debt to equity ratio has been causing a decline in overall profits in the high interest rate environment of the last few years. The Debt to Asset ratio increased to 71.01% compared to 61.50% last year. On the other hand, Long-Term Debt to Equity showed a decline as it decreased from 35.25% in FY09 to 33.21% in FY10. This was essentially due to the decrease in the Long term unsecured loan which was issued by WAPDA, which decreased to Rs 4,247 million from Rs 5,147million last year.
HUBCO on the other hand is even more highly leveraged than KAPCO, but relies more on longer term debt arrangements. Its Debt to Asset ratio is 75% and Debt to Equity is 3.1 times compared to KAPCO's 2.45 times. HUBCO's Long Term Debt to Equity at end of FY10 stands at 79% compared to KAPCO's 33.21%. As such, HUBCO's TIE ratio is 4.10 compared to KAPCO's 2.45.
Earning per share for the year stood at Rs 5.78 representing a decline over last year. Because the number of ordinary shares hasn't changed from the previous year this measure indicates purely the decrease in profits that are attributable to shareholders.
The company paid a total dividend of Rs 5 per share representing a dividend yield of 12%. In line with its industry peers, KAPCO has a high dividend payout ratio of 86.5%. The company has paid a dividend for the sixth straight year.
FUTURE OUTLOOK:
KAPCO has been more severely impacted by the circular debt crisis than its peers. Going forward, the amicable resolution of this issue will help the company reduce its massive short-term borrowing, boost net profit, and thus increase dividends.
The company has a sovereign guarantee on its receivables form WAPDA and earns a yield of SBP discount rate + 4% on it. However, in FY10, it had a negative spread in the interested rate it gets on receivables from WAPDA and the interest rate charged on its payables by PSO. Clearly, this situation is not in the interests of shareholders and the company will have to invoke the sovereign guarantee or use other mechanisms to ensure it is paid on the receivables soon.
Meanwhile, the management has decided to shelve its expansion plans in light of the continuing circular debt crisis. If the situation improves, it is likely that the company will go ahead with its expansion plans which will mean raising more capital either through public offering, leveraging or cutting dividends. The government is currently offering a guaranteed 15% IRR in US Dollars.
Further, the fairly high repair and maintenance charges are unlikely to be repeated in the next two years, and thus the company is likely to see improved profitability next year.
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KOT ADDU POWER COMPANY LIMITED (KAPCO) - KEY FINANCIAL DATA
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Income Statement (Rs.'000) 2002 2003 2004 2005 2006 2007 2008 2009 2010
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Total Revenue 26,290,779 23,211,783 21,842,271 27,563,546 32,833,378 37,086,650 55,947,078 69,363,913 85,934,854
Cost of Goods Sold 14,728,794 15,679,950 13,282,309 17,827,010 22,998,341 28,343,289 46,600,485 -58,373,072 -76,010,946
General & Administrative Expenses 133,322 126,199 113,479 183,421 200,901 289,613 381,261 -727,267 -631,290
Operating Profit (EBIT) 33,446,913 7,808,470 8,709,129 9,895,305 10,062,010 8,911,070 9,727,854 15,133,104 13,066,450
Financial Charges 2,470,803 2,255,825 2,028,032 1,766,735 1,465,498 1,327,430 2,208,130 -6,410,224 -5,335,919
Net Income 30,902,730 5,463,741 6,936,425 8,047,790 5,317,362 4,991,409 7,966,143 5,672,355 5,089,126
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Balance Sheet (Rs.'000) 2002 2003 2004 2005 2006 2007 2008 2009 2010
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Stores & Spares 1,950,146 2,164,652 2,338,037 2,432,928 2,472,538 2,553,701 2,551,182 3,131,479 3,183,207
Cash & Bank Balances 1,134,911 2,497,831 1,690,103 3,762,465 4,366,054 208,999 179,439 400,353 243,996
Total Current Assets 17,422,857 10,836,514 7,941,539 12,327,215 11,503,767 17,642,951 37,083,343 41,162,829 59,634,484
Total Non Current Assets 27,047,553 25,712,750 24,968,752 24,402,841 22,774,015 21,288,075 19,881,118 18,796,425 17,965,609
Total Assets 44,470,410 36,549,264 32,910,291 36,730,056 34,277,782 38,931,026 56,964,461 59,959,254 77,600,093
Total Current Liabilities 4,342,187 36,549,264 3,718,292 5,330,912 2,890,972 9,530,326 26,828,443 28,739,296 47,633,863
Long Term Liabilities 15,108,665 13,484,347 11,172,275 9,112,516 11,264,973 10,537,252 8,808,010 8,136,722 7,471,502
Total Liabilities 19,450,852 20,465,965 14,890,567 14,443,428 14,155,945 20,067,578 35,636,453 36,876,018 55,105,365
Share Capital 8,802,532 8,802,532 8,802,532 8,802,532 8,802,532 8,802,532 8,802,532 8,802,532 8,802,532
Total Equity 25,019,558 16,083,299 18,019,724 22,286,628 20,121,837 18,863,448 21,328,008 23,083,236 22,494,728
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LIQUIDITY RATIO 2002 2003 2004 2005 2006 2007 2008 2009 2010
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Current Ratio 4.01 1.55 2.14 2.31 3.98 1.85 1.38 1.43 1.25
Quick ratio 3.26 1.03 1.35 1.36 2.73 1.40 1.21 1.25 1.14
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ASSET MANAGEMENT 2002 2003 2004 2005 2006 2007 2008 2009 2010
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Inventory Turnover(Days) 44.87 56.56 48.13 66.02 39.50 41.87 30.52 11.45 10.74
Day Sales Outstanding (Days) 151.65 47.95 33.22 30.44 34.15 112.35 188.56 169.83 216.59
Operating Cycle (Days) 196.52 104.51 81.35 96.46 73.65 154.22 219.08 201.27 227.33
Total Asset turnover 0.59 0.64 0.66 0.75 0.96 0.95 0.98 1.16 0.90
Sales/Equity 1.05 1.44 1.21 1.24 1.63 1.97 2.62 3.00 3.82
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DEBT MANAGEMENT 2002 2003 2004 2005 2006 2007 2008 2009 2010
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Debt to Asset(%) 43.74 56.00 45.25 39.32 41.30 51.55 62.56 61.50 71.01
Debt/Equity (Times) 0.78 1.27 0.83 0.65 0.70 1.06 1.67 1.60 2.45
Times Interest Earned (Times) 13.54 3.46 4.29 5.60 6.87 6.71 4.65 2.36 2.45
Long Term Debt to Equity(%) 60.39 83.84 62.00 40.89 55.98 55.86 41.3 35.25 33.21
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PROFITABILITY (%) 2002 2003 2004 2005 2006 2007 2008 2008 2010
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Gross Profit Margin 43.98 32.45 39.19 35.32 29.95 23.58 16.71 15.85 11.55
Net Profit Margin 117.54 23.54 31.76 29.20 16.19 13.46 14.24 8.18 5.92
Return on Asset 69.49 14.95 21.08 21.91 15.51 12.82 13.98 9.46 6.56
Return on Common Equity 123.51 33.97 38.49 36.11 26.43 26.46 37.35 24.57 22.62
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PER SHARE 2002 2003 2004 2005 2006 2007 2008 2008 2010
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Earning per share 35.11 6.21 7.88 9.14 6.04 5.67 9.05 6.44 5.78
Dividend per share 2.99 5.07 7.95 3.86 8.82 7.10 6.23 4.41 5.00
Book value 28.42 18.27 20.47 25.32 22.86 21.43 24.23 26.22 21.56
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COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
DISCLAIMER: No reliance should be placed on the [above information] by any one for making any financial, investment and business decision. The [above information] is general in nature and has not been prepared for any specific decision making process. [The newspaper] has not independently verified all of the [above information] and has relied on sources that have been deemed reliable in the past. Accordingly, the newspaper or any its staff or sources of information do not bear any liability or responsibility of any consequences for decisions or actions based on the [above information].