Risk Analysis on KESC

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Presented by: Tuba Iqbal Dileep Kumar Waqar Arsalan Mohsin Khan
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Introduction

KESC was incorporated as a private limited company in 1913 and subsequently listed on the Karachi Stock Exchange. In 1952, the Government of Pakistan nationalized KESC by acquiring a majority shareholding.

In December 2005 when the Government transferred 73% of KESCs shares to a consortium of investors led by KES Power Limited (KES Power), 60% owned by Al-Jomaih Holding (Al Jomaih), a Saudi industrial group, and 40% by National Industries Holding.

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Siemens Corporation

Siemens contracted for Operational management responsibilities to assist the owners in the turnaround of the utility. is basically only involved in four areas of Generation, Information technology, network and distribution and engineering. the area of Information technology Siemens has successfully implemented SAP in KESC that has made the day to day business of the utility more efficient and
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Siemens

In

 These

included immediate removal of bottlenecks, resulting in approximately 30 megawatts (MW) of additional generation capacity . late 2006, KESCs new turnaround strategy was finalized, and is now being implemented. Generation capacity additions of 780MW rehabilitation and improvement of the T&D network (PRs17 billion/$268 million), rehabilitation of existing generation facilities (PRs600 million/$10 million)
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By

1. 2.

3.

Abraaj Group

In May 2008, Abraaj Capital agreed to invest US$361 million for a 50% stake in KES Power the holding company that owned 71.5% of KESC and take over 100% management control of KESC

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Abraaj Capital
Abraaj

Capital is the largest private equity group in the world outside the US and Europe.

Abraaj

has successfully deployed capital in over 40 investments in 11 countries across the MENASA (Middle East, North America and South Asia), including several landmark transactions and has distributed c.USD 2.9 billion back to investors.
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Inherited to Abraaj in KESC

Financial

Cash

Loss: US$ 14 15 million per month

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Initiatives by Management

Generation & Transmission:

450

MW Gross Generation Capacity added (US$ 300 mn) - 220 MW CCPP 180 MW , GEJB and 50 MW Aggreko
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 Investment

/ Other:

US$ 255 million equity injection by KES Power to date Major fuel and power supply agreements in place: PPA; FSA HR 3,400 non-mgmt to mgmt promotions; 7,000 contracts renewed COD signed with elected CBA after a decade Winners of the Environment Excellence Award 2010

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Analysis of Management Quality

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Degree of risk preference and decision making ( risk---low)

Effective leadership across the board They obtained the positive EBITDA in FY 2011. Rational approach i.e. reducing T&D losses and increasing recovery and generation. Although tariff is increased on consumers but the mechanism is rationalized.
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Strategy & Task Objectives (risk---Low)

Increase its own generation and decrease the reliance on costly furnace oil As 450 MW has already established and 560 MW plant is in the progress Reduced outages and tripping through regular overhauling and maintenance Poor success rate due to deteriorated inherited systems 5/6/12

Organization structure & design (risk---moderate)

Reducing the inefficient workforce which is burdensome for the organization Inefficiency at the middle management level Customer care services Abrupt lay off policies and labor union was disgruntled.

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Process, Information & Control (risk---moderate)

Deteriorated

plant and machinery but streamlining processes , improving operations and governance systems the financial cost and injecting the

Lessening

equity
Promote

diversity and qualified workforce

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Management Matrix
Company rate of earning growth
High earning growth and measured risk preferences

Professio nal

Aggressive
High earning growth and high risk preferences

Administrat ive Moderate

earning growth risk preferences Measure d

Speculative
moderate earning growth and high risk preferences High

Risk Preference s

Negative earning growth

Negative earnings growth and measured risk preferences

Failing

negative earnings growth and high risk preferences

Gambling

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 BMR

and improving generation fleet

Reducing

T & D losses by 3.8 % on rolling average basis date USD 255m is injected as equity. price risk i.e. high FO

To

Commodity

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Recommendations
Enhance

the efficiency at the middle management.

Lay

off policies should be communicated to the workers to avoid disgruntlement and hence labor unrest. strategies to increase recovery from the public sector to lower down the burden on consumers and maintain the companys cash flow.
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Formulate

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Industry Risk Analysis

Forces

Factors Industry growth

Market positions Industry in growing as a there is a gap between the demand and supply of the industry. Still a lot of untapped potential in the industry. Customers are indifferent to cost, as the company is the sole electricity provider in the area. The switching cost is higher There is only one company and the rest distribution companies are have the other market. The information is quite complex as very technical industry, various sources of energy etc.

Degree of risk LOW

Cost competitiveness

Rivalry among existing competitors

Intermittent over capacity Product differences Brand identity Switching cost Concentration and balance Information complexity

Diversity of competition

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Economies of scale Proprietary differences Brand equity

productNO alternative products are available in the market. Only thermal electricity. Strong established brand since last 98 years. Key influenced by the government policies as currently it the sole company providing the electricity to the country. It is regulated industry by NEPRA For generation there are limited suppliers and there power is strong. but for distribution purposes they take from the IPPs and Fewer substitutes available as most of the plants are gas and thermal based and they have to take fuel from the utility companies only. Limited suppliers.

MODERATE

Threat of new entrants

Access to distribution Absolute cost advantage Access to key inputs Government policies

Input differences

HIGH

Presence of substitute

Bargaining power of supplier

Supplier concentration Volume as a driver Cost competencies Unique selling proposition

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Bargaining leverage Buyer information Substitute positioning

Regulated by NEPRA Being only company to provide electricity in the region.

LOW

Bargaining power of buyers

Product strength & brandSingle brand. loyalty Price sensitivity Decision makers incentive Relative price performance of substitute Switching cost High switching cost as alternative to this is the private generator, which is highly costly.

LOW

Threat of substitute

Macro-Economic context Stage in life cycle Level of Innovation

Buyer propensity to substitute Budgets and subsidies toIf changes in subsidy will result the sector in high tariff. Changes to the low costFor generation, hydro or nuclear electricity can be the cheaper sources of electricity. Regulatory polices

MODERATE LOW HIGH

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Key Findings
Potential

growth as there is gap between the demand of 2,562MW against the capacity of 1,583 MW as on December 2010,. of the major challenges to the industry is huge transmission and distribution losses as around 32.2%. is heavy reliance on the thermal. suppliers of natural gas and furnace oil i.e. SSGC and PSO respectively. intervention and tariff is regulated by the regulator called NEPRA
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One

There Sole

Government

 Short

supply of natural gas in the industry is the key threat for the industry as already the percentage of total gas for the electricity sector is reduced to 28% in 2011.

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Recommendations
Should

reduce the reliance on the expensive sources of generating the electricity and switch to cheaper sources like hydel, coal, wind etc. proper actions to restructure the infrastructure in order to control the Transmission and distribution losses to the standardized level. the supplier of both fuel as well the
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Take

Diversify

Business Risk / Operating Cycle Analysis Factor Risk Supply Risk Raw material Seasonality

sourcing

Concentration of Suppliers Price Risk FX / Currency Risk Country Risk Logistics Production capacity risk

Mitigating Factors Risk Level Switch to the cheaper MEDIUM sources of energy like LPG. Diversify the suppliers Incorporated into the tariff

Production Risk

Bound under contract Improve the efficiency level. Operational efficiencies Increasing the maintenance Availability of skilled labors Training Stock up requirement for sudden order Adverse labor relationship Should lead by management by objectives Plant shut down Backup are available Geographical concentration of production Environmental issue inSecurity arrangements

MEDIUM

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Demand Risk

Buyer concentration

Consumer are diversified from consumer to the industries Being utility being no risk. Price is controlled by NEPRA by cost plus basis. NEPRA

MEDIUM

Demand for the goods produced Distribution network availability Price control

Regulatory issues Substitution availability Economic downturn Seasonal demand Credit risk of the buyer Country risk Currency risk

Purchase from other IPPs Credit insurance Hedging HIGH

Collection Risk

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Findings

Sharp rise in trade creditors, shown growth by 126% since last year in fixed assets in order to add the electricity in the stream. collection is 102 days, which is quite cash flows improved to the positive. weak,

Investment Debtors

Negative

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Recommendations
Should

cater the circular debt issue, as accumulation could lead to diverse consequences collection methods in suppliers

Improve

Diversification

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