Kot Addu Power Company Limited (Kapco) was incorporated in April 1996, in Punjab as a public limited company under the Companies Ordinance, 1984 with an 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. Its principal activities include the ownership, operation and maintenance of power plant. Kapco was privatized on June 27, 1996, and its 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%. After the successful completion of sale in February 2005, through public offer by the Privatization Commission (on behalf of Wapda), 18% shares held by the general public. On April 18, 2005 Kapco was listed on all the three stock exchanges of Pakistan.

Kapco is Pakistan's largest Independent Power Producer (IPP) with a generation capacity of 1600 MW. The power plant is a multi-fuel gas-turbine power plant with a capability of using 3 different fuels to generate electricity, namely natural gas, low sulphur furnace oil and high speed diesel. Its power plant is also the only plant in Pakistan has ability to self-start 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

RECENT RESULTS (Q3'08)The company declared an earning per share of Rs 4.34, up 5% y-o-y due to higher indexation and income from overdue receivables from Wapda. Its turnover during the period under review, was Rs 36,904 million (Rs 25,901 million in Jul06-Mar07) and cost of sales was Rs 30,133 million (Rs 19,625 million in Jul06-Mar07).

The increase in cost of production was due to the increased fuel costs. Other than this major component, an increase in financial charges was also witnessed. Other expenses, like administrative, overhauling and maintenance remained at a steady level. Profit from operations was Rs 7,257 million (Rs 6,427 million in Jul06-Mar07). Profit after tax during the period was Rs 3,823 million (Rs 3,629 million in Jul06-Mar07).

On liability side, the short term liabilities showed a tremendous increase in terms of secured liabilities with mark-up arrangement. The above-mentioned head has doubled in the concerned 9M'08 compared to the same period last year. On the assets side, this increase was matched by an increase in its trade debts. The receivables of Kapco have swelled considerably, which may be leading to liquidity problems. Kapco has been acquiring short term loans to overcome the working capital needs.

On the operating front, the company scheduled its maintenance for Nov07-Mar08 period. In February-March 2008 a major overhaul of one gas turbine was carried out and in February 2008 one hot gas path inspection was completed. This has reduced the load factor (69.14%), with an overall availability of 86.8%, (97.6% excluding planned overhauls) for 3Q'08 and increase G&A expenses to Rs 200 million for 3Q'08. The fuel mix for the dispatched output to the company's sole customer (Wapda) was 25.8% gas, 66.7% low sulphur furnace oil and 7.5% high speed diesel. KAPCO is at tariff negotiations stage for its 400-450MW power project that shall add value to the existing shareholders' wealth.

FINANCIAL PERFORMANCE (FY02-FY07 )Total sales stood at Rs 37.08 billion, up from Rs 32.83 billion in last year while cost of sales totalled at Rs 28.43 billion from Rs 22.99 billion in last year. The company posted 6.53 percent negative growth in its net profit during the year at Rs 4.99 billion as against Rs 5.31 billion in the last year.

Analysts said that profits bound to get a hit after a 10-year tax exemption, as per the "Income Tax Ordinance" granted to the company, which was expired in June 2006. The firm is now paying a 35 percent corporate tax on its profits. Going forward, the 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 2007 from Rs 6.04 a year earlier while profit before tax declined to Rs 7.68 billion from Rs 8.59 billion in 2006. The company's earnings growth was also dented by a cut in its electricity sale prices.

Kapco has been witnessing a consistent declining trend of net profit and gross profit margins. The decline that is in consequent of high base effect otherwise net income has been on a rise in absolute terms.

In 2005, the net income and profit margin, both increased. Depreciation of 3.4% in the rupee against the US dollar from an average of Rs 58.5/$ in Jul04 to Rs 60.4/$ in Jun05, and increase in the US inflation (CPI), which stood at 3.01% on average in FY05 compared to 2.19% in FY04 were main contributors to growth. In FY06 Kapco declared Rs 5.3 billion PAT compared to Rs 8.1 billion in FY05, a decline of 34.5%. The profit before tax grew by 5.8%; however, levy of 35.0% income tax on expiry of exemption period caused a major decline in earnings of the company.

ROA and ROE have also declined after remaining historically high and 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, the Kapco still fared well than the industry as shown by its greater-than-average ROA and ROE figures.

The liquidity position has been erratic for the last 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.

However, 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 to decline in FY07.

On the contrary, an assessment of the quick ratio substantiated the commendable liquidity position that Kapco enjoys 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 capitalize on this factor.

Asset management ratios showed a positive mark till 2006 but the situation deteriorated in FY07, as evident from their trends. Soaring demand for power coupled with lower efficiency in maintaining the inventory has given rise to increasing operating cycle trend. DSO and inventory turnover (days) have also increased as a result.

Almost three-fold increase in receivables, prompts Kapco's easy credit policy towards its sole customer Wapda, thus more number of days are required to recover its receivables. Although the Kapco is trying its best to curtail its operating cycle considerably through better marketing and efficiency, but 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 better able to capitalize 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 its assets are debt financed which is a higher percentage than that of other players. Thus, the Kapco has a relatively higher leverage.

Furthermore, as evident from the long term debt to equity ratio, the debt composition changed and became more skewed towards the current liabilities which increased by more than double 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 coupled with timely payment of long-term loans has kept the interest expenses on a lower side. Consequently, the TIE ratio had increased. However, post 2006, tight monetary policy (Jan07-Jun07) gave rise to higher interest payments and added to the cost of borrowing. To mitigate any negative impact, KAPCO should rely more on its equity financing rather than the debt financing like other players have done.

The book value per share has consistently risen since 2003 due to 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 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 compared with other power generating units and are well above the industry averages figures.

BUDGETARY IMPLICATIONS AND OUTLOOK The impact of budget 08-09 will be positive on IPPs. The Rs 66 billion allocated to Wapda, the sole customer of IPPs, would strengthen the cash flows, which would help sustain the financial health of IPPs. Further, the exemption from customs duty on rental power plants will facilitate the addition of the generation capacity to the national grid. One can remain positive on the power sector with expected capacity expansion developments.

IPP sector dynamics are likely to improve further via currency depreciation and spread gained on receivables and borrowings. The semi-annual indexation under the Power Purchase Agreement (PPA) is set for late June 2008. In this regard, the rupee depreciated by 9% against the dollar since January 2008.

With power shortfall estimated at 2500MW and likely to increase during the summers, the widening demand/supply gap has improved the bargaining position of IPPs. Although, the IPPs operate under low risk environment, they are nonetheless exposed to the risk of rising receivables from Wapda with overdue receivables. However, the government considering raise in power tariff by 30% (as reported in the press on June 17), the receivables risk is likely to subside in future.

The dematerialization of 36% 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.

Kapco is at the tariff negotiations stage for its 400-450MW expansion project. Moreover, it has appointed Fitchner as owners' engineer. Continuation of activities related to the expansion project is no assurance/guarantee at this stage that company will increase its generation capacity. However, it might add to current shareholder's wealth.

With a depreciating Pakistani rupee boosting USD indexed returns coupled with a likely increase in electricity tariff, value addition via expansion projects and healthy payout policies, we can maintain an overall positive outlook for Kapco.