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Looking for light at the end of the tunnel

Looking for light at the end of the tunnel

Despite occasional rumours of an impending exit of Abraaj — the foreign controlling stakeholder in the power utility — long ago rubbished by the K-Electric Limited, the company has remained under spotlight at the country’s stock market.

On any trading day, one of the five volume leaders among the 560 stocks listed on the PSX is likely to be KEL. So what is it that lures investors to the KEL shares —a company that Karachi’s captive customers love to hate for its unscheduled load shedding and over-billing?

Perhaps for all its faults, analysts and energy sector watchers are beginning to see a glimmer of hope in the company’s performance going forward. Remaining in the red for 17 years, the company switched to a net profit of Rs2.6bn in FY2012.

KEL claims to be the only vertically-integrated power utility in the country that manages generation, transmission and distribution of electricity.

It was privatized on Nov 29, 2005. Analyst Ali Khan who follows the company for Alfalah Securities recalls: “Despite privatisation, the company continued it’s below par performance and a change of management became inevitable.

The Abraaj group acquired the controlling stake in the company in FY2008”.

Initially Abraaj and AlJomaih/NIG held 72.8pc KEL shares via their holdings in KES Power. Together, they now own 66.4pc of the company. The government retains 24.4pc stake with minority shareholding at 6.7pc. The company invested a huge sum of $1.23bn in capacity addition and efficiency enhancement projects between FY2009 and FY2015.

The latest financial results for the nine months ended March 31 records a net profit at Rs22.8bn, a quantum leap of 40pc from net earnings of Rs16.3bn in the corresponding period of the previous year. The CEO Muhammad Tayyab Tareen attributes it to “continuous and sustained improvement in transmission and distribution (T&D) losses; improved contribution margin due to gains resulting from additional sent out unit and higher thermal efficiencies”.

The T&D losses stood reduced to 22.8pc in the latest nine months, from 23.4pc year-on-year. Veterans recall that back in FY09, as much as 36pc of power ‘went missing’ in T&D losses.

The CEO stated in the directors’ report to the shareholders that the recovery ratio (RR) excluding public sector consumers (PSC), during the nine months stood at 90.8pc. However, recoveries from PSC were 76.2pc; the non-payers identified mainly as the Karachi Water and Sewerage Board (KWSB), City District Government (CDGK) and Sindh Police.

The company’s cash flow statement shows provision of an enormous sum of Rs11.2bn for debts considered doubtful for the nine months under review alone. In all, the balance sheet of KEL carries a staggering sum of Rs45.5bn as ‘debts considered doubtful (of recovery)’—almost all of it from the KWSB and CDGK.

Analyst Ali Khan of Alfalah Securities ascribes the recent improvement in KEL performance also to its strategy of dividing Karachi into four regions and further segregating each region on spectrum of low loss to high loss areas. “It helped utility achieve targeted reduction in T&D losses and almost 90pc reduction in power theft”, said this energy sector expert.

He also pointed out that the company’s net profitability in the last few years was boosted as a consequence of significant tax reversals following a period of severe losses.

The major issue at hand in recent days was the KEL’s multi-year tariff (MYT) that expired in June. Unlike other independent power producers (IPPs) that have fixed investment-based returns, KEL is structured under a multi-year performance based tariff (MYT) that does not offer any return on investment. Instead, the company is simply compensated for the fuel and power purchase costs it incurs as well as the operations and maintenance (O&M) expenses.

A research report prepared by analyst Ali Asghar Poonawala for AKD Securities on July 13 noted that the KEL management had submitted its new tariff petition to Nepra for FY2017 through FY2026. ‘KEL’s current multi-year tariff regime with Nepra was in place since 2002 and later renewed by the regulator in 2009 post acquisition by Abraaj”, said the analyst.

Among a few other changes, the new tariff contains clause for ‘cost of force majeure events’, which would cover costs to KEL for unplanned blackouts, shutdowns of generation facility and nation- wide grid disruptions.

KEL has ongoing plans of expansion and diversification that investors may be looking at as potential sources of increased revenue.

Those include: 700MW coal fired Greenfield project; T&D capital expenditure plan worth $750m; 420MW K-Energy coal conversion project; 50MW to be procured from coal fired Fauji Power starting 1QCY2017 and 50MW to be procured from the gas powered Sindh Nooriabad with expected operations by 1HFY2017.

The price of the KEL stock at the stock market is hovering around Rs8.25, which values the company at Rs228bn on total 27.6bn outstanding shares. Total assets of KEL at the close of last financial year stood at Rs368bn.

Published in Dawn, Business & Finance weekly, July 18th, 2016

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