K-Electric Reports increased earnings for FY 2019 but mounting govt. receivables, COVID-19 shutdown threaten operational sustainability

K-Electric Reports increased earnings for FY 2019 but mounting govt. receivables, COVID-19 shutdown threaten operational sustainability

Karachi, April 09, 2020: The Board of Directors (BoD) of K-Electric (KE) Limited in its meeting held on April, 09, 2020 at the KE Head Office, approved the Company’s financial results for the year ended June 30, 2019. During the reporting period, around PKR 40 billion was invested across the Company’s power value chain. KE remains committed to making further investments across the power value chain despite mounting challenges such as growing government receivables as well as the economic slowdown because of the COVID-19 outbreak.

The KE Board, while appreciating improvements in certain key operational indicators such as sent-out growth and decrease in Transmission and Distribution (T&D) losses, has shown concerns over Company’s negative operating cash flow, increased finance cost, enhanced bank borrowings and distressed working capital situation due to accumulation of government receivables. This, coupled with exchange losses due to significant devaluation of PKR during FY19, has impacted profit before tax of the company from PKR 13.7 billion to PKR 8.8 billion. The Board, in view of the dire cash flow situation of the Company posing a serious threat to operational sustainability and its ability to make future investments, has urged Federal and Provincial Governments and their entities to release outstanding dues at the earliest, which would enable the Company to ensure reliable power supply to the economic hub of the country and to execute its future investment plan on a timely basis. As it is improvements in financial indicators were driven in part through efficiency gains by way of reduced T&D losses (from 20.4% in FY 2018 to 19.1% in FY 2019), along with deferred tax adjustment, and were largely mitigated by a 94% rise in finance cost due to increased working capital requirement on account of continuous accumulation of government receivables and delays in determination of tariff variations.

KE’s balance sheet continued to grow, with total assets increasing to around PKR 598 billion in FY 2019, compared to PKR 474 billion in FY 2018 because of the Company’s continued investment to meet the city’s growing power needs. KE’s investment plan across all business verticals of generation, transmission and distribution has also been designed in view of these power needs which continue to grow, and the Board decided once again to reinvest the profit earned back into the business. However, as a result of continuous accumulation of receivables from government entities and departments, KE’s borrowings to manage working capital alone have already increased substantially to above Rs 120 billion, putting the sustainability of the company at risk.

Moonis Alvi, CEO, KE said; “As we continue towards our objective of ensuring reliable and safe power supply to Karachi and its surrounding areas, KE over the past decade – despite fiscal and other constraints owing particularly to rising government receivables – has invested over USD 2.4 billion across the energy value chain. These investments have resulted in an addition of over 1,057 MW of efficient power generation capacity, improvement of overall fleet efficiency from 30% in FY 2009 to 37% in FY 2019, 16.8 percentage points reduction in Transmission and Distribution (T&D) losses (most by any Distribution Company in the country), enhanced T&D capacity by 42% and 64% respectively, and KE is the only distribution company in the power sector having no contribution towards circular debt. Today over 70% of the city is exempt from load-shed with 100% exemption to industries. KE’s commitment to its customers is underscored by planned investments of around USD 3 billion over the next four years. These investments are tailored towards energy self-reliance and to catalyze the socio-economic growth of Karachi and Pakistan.”

A key point of concern for KE, as with other power sector companies, remains the continually growing circular debt situation affecting the sustainability of the sector. As of February 2020, the outstanding net receivables of KE from Federal and Provincial Governments and their entities have accumulated to over PKR 102 Billion on principal basis, resulting in working capital constraints for the Company. While the power utility is committed to invest further and is continuously engaged with relevant stakeholders for seeking their support, the Company also requests immediate and amicable resolution to the issue of receivables and payables, and reiterates that financial settlements between the Company and public sector entities must be treated in a fair and uniform manner with all settlements whether Federal or Provincial tabled together under one umbrella.

Because of the COVID-19 outbreak, economic activities have almost ground to a halt and the resultant logistical and fiscal bottlenecks may also have an impact in project timelines. In the interest of ensuring that the power needs of Karachi are met and to make sure that service levels are not compromised, KE is committed to ensure that planned projects are completed in a timely manner. The company has also committed to provide relief to the economically challenged segments of society by allowing deferred payment for consumers with less than 300 units per month. This, along with the decision by the government to defer the release of monthly and quarterly fuel adjustments because of COVID-19, will have a drastic impact on cash flow going forward and is likely to impact timelines and service delivery. Receivables from the Government of Pakistan in respect of Tariff Differential Subsidy (TDS) alone, have reached an alarming level of around PKR 193 billion (February 2020)

To manage increasing power demand, KE is making continuous strides towards efficiency improvements and increase in power delivery capacity through additions to its own generation fleet as well as external sources. In this regard, KE is setting up a 900 MW RLNG based highly efficient power generation plant (BQPS-III) at its Bin Qasim Power Complex comprising of two 450 MW units, running on the Combined Cycle Gas Turbine (CCGT) configuration. However, the chronic issue of mounting receivables and the resultant strain on cash flow can potentially impact the operations, timelines of upcoming projects and future investment plan, resulting in increased hardship for the citizens of Karachi and its adjoining areas.

KE has made significant progress on the TP-1000 Project, resulting in capacity enhancement and improved reliability. Over 90% of the project has been completed, adding over 900 MVAs to power transformation capacity, with expected completion later this year. Safety has always been a priority at KE, and the Company has revisited safety procedures and practices for grounding to make them less prone to theft. In addition, the Company is also undertaking revalidation of grounding of its network by examining each and every pole within the KE system with a tagging of the same in the system.

The Board reiterated the Company’s cognizance of the critical role that it plays in Karachi with the assurance that it would continue to work tirelessly to manage routine operations and maintenance which include the purchase of fuel and power. However, considering the severe cash flow constraints highlighted, the Board expressed serious concerns about severe constraints in running day-to-day operations and ensuring seamless supply of power to the city.