Where the buck never stops

Updated 10 Aug 2020

Email

“In the next seven to eight months, we will resolve the gas pressure issue even if we have to install new equipment or a new line,” Alvi said. — File
“In the next seven to eight months, we will resolve the gas pressure issue even if we have to install new equipment or a new line,” Alvi said. — File

K-Electric CEO Moonis Alvi can see the light in the darkness. Quite literally.

“I was coming from Islamabad that night. Karachi lit up brightly as the plane started its descent. It looked beautiful,” he said about the night in the last week of July when Karachi received torrential rain in record time and the city, according to everyone and her aunt, plunged into darkness for hours on end.

Alvi insisted that only 40-50 feeders remained shut for more than six hours that night. “Out of the total of 1,860 feeders, only 80-90 were off at the time (of descent),” he said, implying that more than 95 per cent of the distribution network was up and running within a few hours of the heaviest rain the city has recorded in recent years.

K-Electric CEO says loadshedding is an outcome of the federal government’s flip-flops on key issues

In a wide-ranging interview with Dawn last week in his office, the mild-mannered CEO of Karachi’s sole power distribution company was downright dismissive of unflattering anecdotal evidence. An accountant by training, Alvi showed unassailable faith in the supremacy of numbers in his ledger. He made light of the public outcry over loadshedding. It is ‘noise,’ not signal. The disgruntled few outspeak the satisfied many.

The perpetual deficit

Electricity demand in Karachi peaked in the second week of July. It hit 3,600 megawatts but has since come down to around 3,300MW. Being a vertically integrated company, KE is solely responsible for generating, transmitting and selling electricity in Karachi and neighbouring towns. After accounting for the output of its own generation plants and electricity obtained from the national grid and independent power producers, KE can supply up to a maximum of 3,200MW to its consumers under the best conditions.

So how did the power utility fail to anticipate demand despite being around since 2005 when it shed its old skin and was born anew under private ownership?

The blame lies with the government, according to the KE CEO. “We knew even in 2014-15 that there would be a deficit in 2020. That’s why we conceived a number of projects like a 900MW RLNG plant, a 700MW coal project and another 450MW RLNG project in collaboration with Engro.”

The coal plant received approval, but the government then had afterthoughts. It insisted that the plant should run on local coal instead of imported one. KE redrew the entire plan and went back to the government for approval. But the government changed its mind for the second time. It asked KE to shelve the project for good. The government had already commissioned too much electricity elsewhere in the country. So it wanted KE to buy excess capacity in the national grid from the federal government–owned National Transmission and Despatch Company (NTDC).

“We had planned for self-sufficiency. But the 900MW plant was delayed by two years for tariff reasons, the 700MW plant was shelved and the Engro plant was also put aside owing to excess capacity. If we were allowed to stick to the original plans, we would have sufficient electricity today even after relinquishing 650MW that we get from the federal government,” he said.

The government gave formal approval for evacuating excess energy from NTDC in June. KE expects to start doing it next year.

Next year and beyond

Will 2021 be any different? The answer depends on Sui Southern Gas Company (SSGC) to a large extent, Alvi says. It’s supplying low-pressure gas, which makes it inefficient to run power plants. Half of the current supply-demand gap of 400MW can be bridged overnight only if SSGC ensured the right level of pressure, he said. But he cannot do anything about it because KE has no formal fuel purchase agreement with SSGC.

The power sector regulator does not accept this excuse though. KE cannot be absolved of the negative impact that this underutilisation has on the consumer tariff, the regulator has said, because ensuring fuel availability is its own responsibility.

“In the next seven to eight months, we will resolve the gas pressure issue even if we have to install new equipment or a new line,” Alvi said.

Projections are that peak demand in Karachi will touch 3,900MW next year. KE’s current system can supply 3,000MW under normal circumstances. It expects to add another 300MW from the national grid. Separately, the company will shut down two of its old plants and add a new one, resulting in a net increase of 250-270MW. It means the total net addition to the KE system will be 550-570MW next year.

Accounting for about 70MW from wind power plants and another 70MW from Kanupp, the KE system is expected to have around 3,700MW in 2021. This will still be 200MW short of peak demand.

The power sector regulator reserved some stinging criticism for the company in one of its latest reports. “Historical record shows that KE underutilised its power plants whereas it continued to carry out loadshedding,” said National Electric Power Regulatory Authority (Nepra) in its recently released state of the industry report for 2019.

Deep in circular debt

In 2018-19, the latest period for which the company’s financials are available, KE’s net profit amounted to Rs17.2billion, up 40.3pc from a year ago.

Yet the ratio of cash flow from operations to revenue remained negative, which means it’s unable to turn its sales into usable hard cash. Meanwhile, KE’s cash flow from financing activities rose by 761pc over the same period. This shows the company resorted to massive leverage — increasing debt as opposed to equity — to stay liquid.

“The government has not paid us tariff differential claims since July 2016,” Alvi retorted. But KE too has withheld payments to NTDC. Its current liabilities jumped 43.4pc in 2018-19 to Rs295.3bn.

“They owe us Rs240bn and we owe them Rs170bn. KE should get Rs70bn if liabilities and receivables are netted off. We had to finance that gap by borrowing,” he said.

Turnaround story?

Some commentators hail KE as a turnaround story. But many key performance indicators of KE don’t bear comparison with those of state-owned distribution companies. For example, KE’s recovery ratio was 92.6pc in 2018-19 as opposed to distribution companies of Multan (99.35pc), Faisalabad (99.3pc) and Lahore (97.7).

Similarly, KE’s transmission and distribution losses (T&D) were also higher than those of many state-owned Discos. Average daily loadshedding by KE in 2018-19 was 1.77 hours, higher than that by Discos of Multan, Faisalabad, Gujranwala and Islamabad. In terms of the number of consumer service complaints, KE was once again at the top even though it’s not the largest player.

“I don’t know why these companies are posting losses if they have such fantastic recovery ratios and low T&D losses,” Alvi said, implying some financial sleight of hand.

The jury may still be out on whether consumers are better off with KE in private hands, but the verdict is loud and clear for its investors. They seem to have mistaken the map for the territory at a heavy cost.

The company has reinvested all its profits amounting to Rs125bn since 2012. There has been neither dividends nor share price appreciation. Their consistent attempt to sell the company to Shanghai Electric Power has been unsuccessful since 2016.

“Sponsors wanted to sell it for $1.88bn in 2016-17. That would translate into an 8pc return on investment, which wasn’t very high,” Alvi conceded. Hesitatingly speaking on the issue, he added the price will be lower than the earlier one now because of a sharp change in the exchange rate.

The company claims to have invested $2.4bn since 2009 and intends to invest another $3bn in the next four years. Going by these numbers, the expected selling price looks underwhelming. Alvi reservedly agreed. “Our new 900MW plant alone is worth $650m. In addition to that, our capex (capital expenditure) in 2020 is Rs30bn, which means another $160m.”

KE’s holding company is KES Power, an offshore entity registered in the Cayman Islands. The doomed private equity fund Abraaj Capital held a majority stake in the offshore company until recently. But its name appears to have been airbrushed from the company’s history after its CEO was arrested last year for misappropriating investors’ funds.

“Abraaj Capital acted only as a management company. Investors actually belonged to the Infrastructure and Capital Growth Fund. Now Abraaj is gone. But the fund and the investors are here,” Alvi said.

Published in Dawn, The Business and Finance Weekly, August 10th, 2020