kesc analyst briefing oct 2012

7/30/2019 KESC Analyst Briefing Oct 2012

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KARACHI ELECTRIC SUPPLY COMPANY LIMITED

Analyst Briefing

October 04, 2012


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DISCLAIMER

This presentation and discussion conducted today may contain forward looking statements including time

lines, strategies and plans going forward. Forward looking statements and the associated impact on the

Karachi Electric Supply Company Limited (KESC or the Company) are subject to systematic and

unsystematic risks and situations that KESC has no control over. Furthermore, as KESC is dependent on several

parties/ factors for its operations including, but not limited to, fuel supplies, supply of equipment, operations,

regulatory affairs, revenue and cost drivers; the information contained and discussed is subject to

circumstances affecting decisions and actions of these parties/ changes in such factors. Although KESC believes

that assumptions behind matters discussed were reasonable when made, results may differ due to inherent

risks as above.

As such the discussion and presentation may not contain all the information required for Company analysis.

Each Analyst is therefore advised to conduct independent investigations and analysis and should check the

accuracy, reliability and completeness of the information contained within the discussion and presentation,

and where necessary, obtain independent advice from appropriate sources. KESC and its employees make no

representation or warranty and shall incur no liability under any law, statute, rules or regulations as to the

precision (accuracy), reliability or completeness of this discussion and presentation.

KESC is not obligated to update or revise statements made, unless, as required under laws applicable to the

Company.


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BUSINESS HIGHLIGHTS


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`

PERFORMANCE OVERVIEW (1/3)

Generation

Installation of the new 560MW Power Station complete- site efficiency of 45.5%

Improvement in average annual fleet efficiency from 33.5% to 34.3% over the year current fleet efficiency of 38%

49% increase in generation capacity to date (1010 MW added)

Transmission

Distribution

Annualized T&D Losses at June 30, 2012 stood at a 17 year record low of 29.7%

Collections Improved to 95% in areas consuming more than two thirds of energy while

Company wide collections increased by 3.1% closing at 88.7% on 30 June, 2012

Load Shed: 50%-exempted; 10%-3 hrs. Industry Exempt throughout the week. Complete

exemption in the city on Sundays

Distribution Service Provider agreements being explored for 11 high loss areas with average

losses in excess of 50% - Agreements signed for Gadap & Orangi I, on going negotiations for

few more areas

Over 25,000 new connections added during the year amounting to load addition of 200MW, 112 KM of overhead and underground lines added to the distribution system

8 x 132 kV Hybrid Grid Stations linked to SCADA System, integration work in progress

DHA Grid added total 61 grid stations in the network

A comprehensive Project to further rehabilitate/ expand the EHT network developed

Third successive performance based appraisal rolled out

5,516 management staff and 5,922 non-management staff appraised under the annual

Performance Management System resulting in promotion of 308 management employees

and 300 non-management employees

Human

Resources

Significant transformational strides have been made ..


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Pakistans first Utility Sector Retail Bond Issue of PKR 2 bn launched

Fixed coupons of 13% (13 months), 14.75% (3 years), and 15.5% (5 years)

Fully subscribed within six weeks of subscription opening as against the total stipulated time

frame of 3 months


PPA with NTDC: Tariff Differential of PKR 45.0 bn paid during FY 12 and PKR 134.1 bn since

the signing of PPA directly with NTDC by Ministry of Finance as per payment mechanism

under PPA GOP receivables of PKR 70.2 bn as of to date:

Tariff Differential of PKR 40.3 bn (to be paid directly to NTDC)

KWSB receivables of PKR 18.9 bn to be paid / adjusted against SSGC payables

GST of PKR 2.5 bn receivable from FBR

Interest on GoP payables (SSGC & NTDC) and GoP receivables not accrued

Circular

Debt

Financial Major turnaround in net earnings positive net profit earned after a period of 17 years

Net profit of PKR 2.6 bn for FY12 as compared to a net loss of PKR 9.4 bn in FY11

Entity Rating A- long term entity rating assigned by PACRA

Instrument rating ofAA assigned by PACRA

Fuel Mix

Increase in fuel prices, negative impact on cash flow of PKR 5.1 bn

Gas average supply was 169 MMCFD (FY11: 153 MMCFD; FY10: 188 MMCFD) against

allocated level of 276 MMCFD for existing fleet and 130 MMCFD for new 560 MW plant,

resulting in additional PKR 30.7 bn incurred on FO during last 3 years

KESC AZM

TFC


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Organized the biggest football tournament in the countrys history, Conducted under 15

football talent hunt program engaging over 1,000 children from the city

300 children of non management employees awarded fully paid scholarships for technicaltrainings at Amantech and Hunar foundation, Partnership with INJAAZ Pakistan

Over 1.53 million consumers tapped through mass awareness activities on conservation

Transformation from conventional to energy efficient lighting in house and at several

institutes, hotels and commercial centers

Facilitated and advised on installation of power factor capacitors for industrial consumers

CSR /

Enercon

Information

Technology

SAP Industry Solution for Utilities (ISU)/Customer Relationship Management (CRM)

Successfully rolled out in Defence and North Nazimabad IBCs. SAP roll out in KIMZ, SIMZ,

Gulshan-e-Iqbal, Gulistan-e-Johar, Clifton and PSC IBCs completed in July 2012

Approximately 45 % of total customer revenue of KESC transformed onto SAP ISU

Supply

Chain

Process driven initiatives resulting in improvement in availability of materials and

inventory rationalization

Marketing &Comms

AZM change management program rolled out - focus on organizational developmentthrough employee engagement, bridge communication gap between employees and

management

Largest change management initiative in Pakistan, participation of around 8,500

employees


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Socio-economic: stagnated economy, high inflation and 47% increase in average tariff - negatively

impacting customers propensity to pay

Poor law and order situation hampered loss reduction and recovery efforts in 11 of KESCs IBCs

(no-go areas) with combined average T&D losses of above 50% representing one-third of all

energy served

Political environment not ideologically aligned to the objectives and needs of a privatized utilitycompany operating in the largest and most volatile city of Pakistan potential further regime

change in 2013

Fuel Mix: inconsistent supply of gas resulting in need to increase consumption of furnace oil (FO

3.5x more expensive)

Regulator (NEPRA) rejection, without logical reasoning, of two petitions to remove various

structural anomalies in tariff formula

Significant challenges remain ..


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FINANCIALS


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4.0 times

1.9

times

44%

EBITDA

1.1

times

1.4

times

100%

CONTRIBUTION MARGIN

6%

36%

1.3 times

NET PROFIT / (LOSS)

HIGHEST PROFIT IN KESC HISTORY AND FIRST AFTER A GAP OF 17 YEARS

T&D LOSSES


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FINANCIAL RESULTS FY 12 (1/2)

DescriptionActual

FY11

Actual

FY12Inc/(Dec)

%

REVENUE

Revenue from Sale of Energy 85,927 92,570 7.7

Tariff Adjustment 44,581 70,029 57.1

Total Revenue 130,508 162,599 24.6

Rate/Unit 8.54 9.01 5.4

Power Purchases (65,296) (74,658) 14.3

Cost of Fuel (50,694) (58,597) 15.6

COST OF FUEL AND POWER PURCHASE(115,990) (133,255) 14.9

Contribution Margin 14,517 29,344 102.1

Contribution Margin % 11.1% 18.0% 6.9

Contribution Margin /Unit Billed (Rs.) 1.44 2.86 97.9

O&M Expenses (12,536) (14,662) 17.0

Provision for doubtful Debts (2,239) (2,462) 9.9

Other Charges/ Other Income 4,851 6,446 32.9

EBITDA (before VSS) 4,594 18,667 306.4

VSS 1,123 1,291 15.0

EBITDA - (after VSS) 3,471 17,376 400.6

Depreciation & Amortization Expenses (8,397) (7,105) (15.4)

Financial Charges (5,127) (7,702) 50.2

Taxation (Current / deferred) 661 52 (92.2)

(Loss) / Profit (9,393) 2,620 128-

--------------(PKR million)---------------


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FINANCIAL RESULTS FY 12 (2/2)

ASSETSActual

FY 12

Actual

FY 11EQUITY & SHARE CAPITAL

Actual

FY 12

Actual

FY 11

Property, plant and equipment 169,031 167,491 Share Capital & Reserves 98,218 84,884

Intangible assets 19 23 Accumulated losses (82,855) (87,333)

Long-term loans/ deposits 164 80 15,363 (2,449)

Total Non-Current Assets 169,214 167,594 Surplus on revaluation 27,095 28,953

Amount due from GoP due from the Government 318 635 Long term financing

Stores & spares Banks 35,754 36,586

Gross 6,517 6,472 NTDC 5,745 10,545

Provision (412) (332) KANUPP 989 -

6,105 6,140 Others 696 26

Trade debts 43,184 47,157

Gross 67,064 55,887 Long-term deposits 4,754 4,333

Provision (17,683) (16,531) Deferred liabilities 5,158 5,606

49,381 39,356 Deferred revenue/Specific grant from GOP 16,103 16,493

Loans, advances and Trade deposits & prepayments 2,719 3,462 Deferred tax liability 14,590 15,590

Other receivables 41,520 17,860 Total Non Current - Liabilities 83,789 89,179

Derivative 2,135 37

Cash and bank balances 1,184 1,269

Total Current Assets 103,362 68,759 Trade and other payables 98,892 75,299

Accrued mark-up 3,740 5,009

Short-term borrowings 23,420 21,374

Short-term deposits/Provisions/Taxation 6,059 8,492

Current maturity and overdue installment of

long-term financing14,217 10,496

Total Current Liabilities 146,328 120,670

TOTAL ASSETS 272,576 236,353 TOTAL EQUITY & LIABILITIES 272,576 236,353

------------------PKR In Mn------------ ------------------PKR In Mn------------


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BQPS I Coal conversion Project : 420 MW in first phase

KESC and BEEGL (a Hong Kong based investment company) have entered into a Joint Development

Agreement for the Bin Qasim Coal Conversion Project (starting with Phase I - 2 units of 210 MW each), wherebyBEEGL will fund the Project

Project feasibility Study for the Project, carried out by Knight Piesold & Company completed

ITB documents have been sent out to all potential EPC bidders and responses are being received

KESC and BEEGL are in the process of finalizing Project structure and are engaged with the Regulator

A coal mine has been identified in Indonesia for the project, which has around 100 million tons of remaining

reserves, sufficient enough for long term fuel availability over the life of the project

PLANS GOING FORWARD

Karachi Biogas Pre-feasibility studies completed by Biogas Technology provider-Highmark Renewables, Canada

In dialogue with KMC and Commissioner Karachi for provision of land adjacent to LCC and support in feedstock

supply chain

Potential Project partners include GE, IFC, Acumen, Aman Foundation, Fertilizer companies

Thar Coal

Joint Development Agreement between KESC and Oracle Coalfields signed

Short listing of consultants for Power Plant feasibility carried out and accordingly negotiation is underway

Dialogues underway with Sindh Engro Coal Mining Company (SECMC) to arrive at collaboration for setting up

power plant based on Thar Coal

LNG

In contact with all key stakeholders including EVTL, FOTCO, Shell, CoP, Vitol, GE and PGL

Adopting a wait and watch strategy till GoP arrives at clarity on weighted average cost mechanism and LNG

import strategy


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THANK YOU


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Q & A


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KESC TARIFF MECHANISM PERFORMANCE BASED TARIFF

No provision for ROI/ROA Tariff formula is structured such that company

makes profits only through:

Loss Reduction beating the NEPRA loss curve Efficiency improvement

Multi Year Tariff (MYT)

KESC tariff is determined through performance based Multi Year Tariff (MYT)

formula

MTY to be in place for 7 years from date of signing of Amendment Agreement,

April 13th 2009

Cost Variation Adjustment

Fuel Surcharge Adjustment (FSA) : Monthly adjustment from increase /

decrease in fuel component of own generation and fuel component of Power

Purchased

Impact of actual T&D losses for the month not considered

Quarterly Tariff Adjustment

Fuel component (own) and Power Purchase Component (including fuel, O&M

and capacity payments) variation of the last month of the current quarteroverthe same cost for the last month of the previous quarter

Unrecovered cost due to non adjustment of T&D losses in the monthly

FSA component

Variation in capacity payment costs and O&M, costs of IPPs and

external sources

Other unrecovered costs

Final Tariff

Annual CPIadjustment

Monthly & QuarterlyCost Variation *

Base Tariff

* based on NEPRA T&D LOSS CURVE and Efficiency


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GAS PRODUCTION & CONSUMPTION PATTERN

70.1% 71.0% 70.8% 72.5%

23.6% 22.0% 19.4% 18.6%

4.8% 4.9%4.7% 1.5%

1.4% 2.0% 5.1% 7.4%

1,400,0251,454,194

1,482,8481,545,994

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

2006 2008 2010 2012

Sindh Baluchistan Punjab NWFP Total (mill CFT)

Natural Gas Consumption by Sector (% Share)Natural Gas Production by Province (% Share)

Note:Difference of production and consumption pertains to Transmission losses by gas fields, distribution losses by distribution companies & gas used for compression.

Source: Energy Year Book 2011 & Economic Survey 2011-12

Gas supply to Pakistans power sector has decreased from

40.1% in 2006 to 27.5% in 2012.

Overall Gas production has increased by 1.7% annually since

2006.


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STATEMENT OF MAJOR RECEIVABLES FROM/PAYABLES TO GOP ENTITIES/IPPS

** PKR 1.44 bn classified as long term based on agreement with KANUPP which is to be paid in monthly installments of PKR 50 million each. Initially two

weekly installments of PKR 100 mn along with monthly installment of PKR 50 mn paid from Jan to Sep 2012.

A. MAJOR RECEIVABLES B. MAJOR PAYABLES (CURRENT)

FEDERAL GOVERNMENTPKR

in bn.

PKR

in bn.

Tariff Differential Claims 40.28 KANUPP** 0.04

GLMP Claim 12,500 MT (Nov 01, 10 Nov 05, 10) 0.34 SSGC 27.44

Interest on FIP Loan 0.24 NTDC 30.43

General Sales Tax (GST) Refund 2.49 P S O 4.03

Other Federal Departments, bodies 1.53 Other Federal/ Provincial dues 3.99

Total 44.88 Grand Total: 65.93

PROVINCIAL GOVERNMENT NTDC

KWSB Strategic Customer (covered under the IA) 18.91 Current 30.43

CDGK (City Government Karachi) 5.14 Less: Tariff differential Claim 40.28

Other Provincial Departments, Bodies, etc 1.32 Net Current Payable (9.85)

Total 25.37 SSGC

Total 27.44

Less: KWSB 18.91

Total Provincial and Federal Government Dues 70.25 Net Current Payable 8.53

ORDINARY CONSUMERS (Residential/ Commercial

/ Industrial)

Dues from Residential/Commercial/Industrial 49.74

Grand Total 119.99

KESC - Statement of Major Receivables & Payables from/to Government Entities


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MAJOR PAYABLES SUMMARY FY 2012

(PKR mn) (PKR mn)

NTDC SSGC

Purchases 57,604 Purchases 29.992

Payment (46,000) Payment (24,279)

11,604 5,713

TAPAL Gul Ahmed

Purchases 10,446 Purchases 9,637


184 154

Kanupp PSOPurchases 4,082 Purchases 34,996


436 (300)

Receivable

TDC

Claims 66,720

Receipts (45,000)

21,720TOTAL KWSB + CDGK + Others

Purchases 146,757 Billing 17,797

Payment (128,966) Recovery (13,837)

17,791 3,960

25,680

kesc analyst briefing oct 2012

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