MARI GAS COMPANY LIMITED

Presented by

Sumaira Yousuf

Sabiha Bibi

Presented to

Mr. Faisal Rizwan

Why Cease to Grow When Opportunity Awaits You….

0

CONTENTSINTRODUCTION & COMPANY STRUCTURE.......................................................................................................................2

Key Highlights...................................................................................................................................................................2

Electricity generation in Pakistan & Current Context.......................................................................................................3

SCOPE OF THE PROJECT....................................................................................................................................................5

INITIAL COST.....................................................................................................................................................................5

Company’s current WACC................................................................................................................................................6

New Project WACC...........................................................................................................................................................6

CASH FLOWS....................................................................................................................................................................7

SCENARIOS.......................................................................................................................................................................7

BASE Case.....................................................................................................................................................................7

Worst Case...................................................................................................................................................................9

BEST CASE...................................................................................................................................................................10

NPV, IRR & MIRR............................................................................................................................................................11

Base Case....................................................................................................................................................................11

Worst Case.................................................................................................................................................................12

BEST CASE...................................................................................................................................................................13

CONCLUSION..................................................................................................................................................................14

Benefits for MARI GAS................................................................................................................................................14

Limitations......................................................................................................................................................................14

REFERENCES...................................................................................................................................................................15

APPENDIX.......................................................................................................................................................................16

Calculation of KAPCO Beta through Pure Play Method..............................................................................................16

1

INTRODUCTION & COMPANY STRUCTURE

MARI gas is one of the largest national exploration and production companies of Pakistan.MGCL’s Habib Rahi gas reserve base which is its main stay was discovered by the company when it operated as a branch of Esso eastern Inc. in 1957

MGCL primarily operated as a production company till 2001, developing the discovered Habib Rahi reservoir in phases of supply & gas to the new reservoir in phases for supply of gas to the new fertilizer plants which were being built in the country for urea production.

It is registered as a public limited company, listed & traded on all three stock exchanges of Pakistan.

 Shareholder %ageAmount (Rupees in Million)

 Fauji Foundation 40% 147.00 Government of Pakistan 20% 73.50  OGDCL 20% 73.50 General Public 20% 73.50 Total 100% 367.50

As of 2009, it has a total of Rs. 20,451.502 million, out of which 39.2% is financed through equity, & the rest through debt.

Mari Gas has a huge potential of expand its business in producing electricity. This project would demonstrate it.

Key Highlights

According to Pakistan Power Infrastructure Board (PPIB), the power demand in the country is likely to grow at 12% every year1

The Government of Pakistan (GOP) guarantees the performance obligation of its entities such as the power purchaser, fuel supplier, etc. and provinces. GOP also provides protection to sponsors and lenders in case of termination of the project. The Government of Pakistan guarantees protection against changes in taxes & duties and specified political risks.

Any variation in price of fuel would be passed through to the power purchaser. Similarly any additional taxation over and above the Tariff assumptions is liable to be passed on to the power purchaser.

1 www.ppib.gov.pk

2

Electricity generation in Pakistan & Current Context

Electricity in Pakistan is generated, transmitted, distributed and retail supplied by two vertically integrated

public sector utilities: Water and Power Development Authority (WAPDA) for all of Pakistan (except

Karachi), and the Karachi Electric Supply Corporation (KESC) for the City of Karachi and its surrounding

areas. There are around 19 independent power producers that contribute significantly in electricity generation

in Pakistan.

For years, the matter of balancing Pakistan's supply against the demand for electricity has remained a largely

unresolved matter. Pakistan faces a significant challenge in revamping its network responsible for the supply

of electricity.

Electricity generation in Pakistan has shrunk by 50% in recent years due to an overreliance on hydroelectric

power. In 2008, availability of power in Pakistan fall short of the population's needs by 15% Pakistan was hit

by its worst power crisis in 2007, after the assassination of Benazir Bhutto and the following riots.

Production fell by 6000 Megawatts and massive blackouts followed suit. Load Shedding (deliberate

blackouts) and power blackouts have become severe in Pakistan in recent years. The main problem with

Pakistan's poor power generation is raising political instability, together with rising demands for power and

lack of efficiency.

Hydroelectricity is the most efficient way to cope with the demand of electricity, but since the construction of

Kala Bagh dam has shaped to a political issue, apparently the country has to rely on using fossil fuel, which

is already meeting 65% of the total generation2.

2 http://en.wikipedia.org/wiki/Electricity_sector_in_Pakistan

3

SCOPE OF THE PROJECT

Growing demand

Supply and Demand of Electricity in PakistanSupply and Demand Position: 2008-2020 (MW)

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020Existing Generation 15,903 15,903 15,903 15,903 15,903 15,903 15,903 15,903 15,903 15,903 15,903 15,903 15,903

Proposal / Committed Generation

530 4,235 7,226 10,115 10,556 13,307 13,520 14,607 16,134 18,448 18,448 18,448 18,448

Total Existing/Committed Generation

16,484 20,138 23,129 26,018 26,459 29,210 29,423 30,510 32,037 34,351 34,351 34,351 34,351

Expected Available Generation 13,146 16,110 18,503 20,814 21,167 23,368 23,538 24,408 25,630 27,481 27,481 27,481 27,481

Demand (Summer Peak) 16,484 17,868 19,352 20,874 22,460 24,126 25,919 28,029 30,223 35,504 34,918 37,907 41,132

Surplus/Deficit Generation -3,338 -1,758 -849 -60 -1,293 -758 -2,381 -3,621 -4,593 -8,023 -7,437 -10,426 -13,651

Source: Private Power and Infrastructure Board - Govt. of Pakistan

INITIAL COST

To purchase a 100MW turbine, it would cost approximately 100 million USD. This would incorporate the cost of

various auxiliaries: Gas treatment units, pressure regulators, transformers, breakers, generator to produce electricity

& a switchyard to dispatch power to the utility company. It would take approximately six months to put up the

turbine.

A turbine normally lasts for 30 years. The depreciation method used to manage turbine is straight –line, which is also

used by MGCL for managing its other assets. The depreciation per year would amount to RS. 286.666666 million

Per year.

4

Company’s current WACC

Company’s current WACC

WACC= kd(1-T)(wd)+ks(we)

15(0.392)(.35)+20.30(0.4025)

2.058+8.12

10.178

New Project WACC

Rf Rm % of Debt % of EquityUn-levered Beta of KAPCO Beta of the Project ke kd WACC

12% 7% 0% 100% 0.151 0.151 0.11 14 0.11

12% 7% 10% 90% 0.151 0.156 11.21 14.5 11.03

12% 7% 20% 80% 0.151 0.164 11.17 15 10.89

12% 7% 30% 70% 0.151 0.173 11.13 15.5 10.81

12% 7% 40% 60% 0.151 0.186 11.07 16 10.80

12% 7% 50% 50% 0.151 0.203 10.90 16.5 10.81

12% 7% 60% 40% 0.151 0.230 10.80 17 10.95

12% 7% 70% 30% 0.151 0.274 10.62 17.5 11.15

12% 7% 80% 20% 0.151 0.362 10.30 18 11.42

12% 7% 90% 10% 0.151 0.626 8.90 18.5 11.71

CASH FLOWSThe current tariff charged by HUBCO in Rs.4 KW/hr. A 100MW gas turbine produces 770,880 MW/hr. 12%

of the total time in a year is required to maintain it, as a result 770880,000 KW/hr (100MW *

24hrs*365*0.88) would be produced in a year.

5

The government makes contracts with IPPs to buy a specified amount of electricity every year. However, the tariff agreement is normally renewed every 5 years

SCENARIOS

BASE CaseAn agreement is made with the government that specifies tariff for 5 years. If the tariff remains the same for the coming ten years then:

1- 10 YearsSales 3083.52-Variable Cost 246.682Contribution Margin 2836.84-Fixed Cost 61.6704EBIT 2775.17

6

  Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10EBIT 2775.16

82775.17

2775.17 2775.17 2775.17

4316.928

4316.93 4316.93

4316.93

4316.93

Interest Exp

1376 1376 1376 1376 1376 1376 1376 1376 1376 1376

Savings 1399.168

1399.17

1399.17 1399.17 1399.17

2940.928

2940.93 2940.93

2940.93

2940.93

-     

    

Dep

reci

atio

n

-286.66667

-286.67 -286.67 -286.67 -286.67 -286.66667

-286.67 -286.67 -286.67

-286.67

Earning before taxes

1685.83467

1685.83

1685.83 1685.83 1685.83

3227.59467

3227.59 3227.59

3227.59

3227.59

-          Taxes 35%

5.90042133

5.90042

5.90042 5.90042 5.90042

11.2965813

11.2966 11.2966

11.2966

11.2966

Earning after taxes

1679.93424

1679.93

1679.93 1679.93 1679.93

3216.29808

3216.3 3216.3 3216.3 3216.3

+

Dep

reci

atio

n

286.666666

286.667

286.667 286.667 286.667

286.666666

286.667 286.667

286.667

286.667

Net Income 1966.60091

1966.6 1966.6 1966.6 1966.6 3502.96475

3502.96 3502.96

3502.96

3502.96

7

Worst CaseThe only factor that would change the level of sale generation is that competitors might start to sell at a price lower than Rs. 4. If they go down to Rs 3, then the case would be:

1- 5 Years 5-10 YearsSales 3083.52 2312.64-Variable Cost 246.682 246.682Contribution Margin 2836.84 2065.958-Fixed Cost 61.6704 61.6704EBIT 2775.17 2004.288

  Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10EBIT 2775.168 2775.17 2775.1

72775.17 2775.17 2004.29 2004.29 2004.2

92004.29 2004.29

  1376 1376 1376 1376 1376 1376 1376 1376 1376 1376Savings 1399.168 1399.17 1399.1

71399.17 1399.17 628.288 628.288 628.28

8628.288 628.288

-         

Depreciation

-286.67 -286.67 -286.67 -286.67 -286.67 -286.667

-286.67 -286.67 -286.67 -286.67

Earning before taxes

1685.83467

1685.83 1685.83

1685.83 1685.83 914.955 914.955 914.955

914.955 914.955

-          Taxes 35%

5.90042133

5.90042 5.90042

5.90042 5.90042 3.20234 3.20234 3.20234

3.20234 3.20234

Earning after taxes

1679.93424

1679.93 1679.93

1679.93 1679.93 911.752 911.752 911.752

911.752 911.752

+ Depreciation

286.666666

286.667 286.667

286.667 286.667 286.667 286.667 286.667

286.667 286.667

Net Income 1966.60091

1966.6 1966.6 1966.6 1966.6 1198.42 1198.42 1198.42

1198.42 1198.42

8

BEST CASE

After 5 years & at the end of the agreement on tariff, due to inflation or perhaps because the competitors have increased their prices, the rates might rise to rupees 6.Then the cash flows would be as follows:

1- 5 Years 5-10 Years

Sales 3083.52 4625.28

-Variable Cost 246.682 246.682Contribution Margin 2836.84 2065.958

-Fixed Cost 61.6704 61.6704

EBIT 2775.17 4316.928

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8

Year 9

Year 10

EBIT 2775.168 2775.17

2775.17

2775.17

2775.17

4316.928 4316.93

4316.93

4316.93

4316.93

Interest Exp

1376 1376 1376 1376 1376 1376 1376 1376 1376 1376

Savings 1399.168 1399.17

1399.17

1399.17

1399.17

2940.928 2940.93

2940.93

2940.93

2940.93

-         

Depreciation

-286.66667

-286.67

-286.67

-286.67

-286.67

-286.66667

-286.67

-286.67

-286.67

-286.67

Earning before taxes

1685.83467

1685.83

1685.83

1685.83

1685.83

3227.59467

3227.59

3227.59

3227.59

3227.59

-          Taxes 35%

5.90042133

5.90042

5.90042

5.90042

5.90042

11.2965813

11.2966

11.2966

11.2966

11.2966

Earning after taxes

1679.93424

1679.93

1679.93

1679.93

1679.93

3216.29808

3216.3 3216.3 3216.3 3216.3

9

+ Depreciation

286.666666

286.667

286.667

286.667

286.667

286.666666

286.667

286.667

286.667

286.667

Net Income 1966.60091

1966.6 1966.6 1966.6 1966.6 3502.96475

3502.96

3502.96

3502.96

3502.96

NPV, IRR & MIRR

Base Case

Years

Project 0 1 2 3 4 5 6 7 8 9 10-8600

1966.6 1966.6 1966.6 1966.6 1966.6 1966.6 1966.6 1966.6 1966.6 1966.6

Discount Amount 1744.91

1601.904

1445.762

1304.839

1177.653

1062.863

959.263

865.7609

781.3726

705.2099

Cash Inflows

11649.54

Cash Outflows 8600

NPV3049.538

IRR 19%

Finding FVs

3207.946

3378.985 3157.93

2951.336

2758.258

2577.811

2409.17

2452.387

2104.262 1966.6

F.v26964.69

PV 8600

MIRR 12%

Worst Case

10

Years

Project 0 1 2 3 4 5 6 7 8 9 10-8600

1966.6 1966.6 1966.6 1966.6 1966.6 1198.42 1198.42 1198.42 1198.42 1198.42

Discount Amount 1774.91

1601.904

1445.762

1304.839

1177.653

647.6949

584.5622

527.5832

476.1581

429.7456

Cash Inflows

9970.81188

Cash Outflows 8600

NPV1370.81188

IRR 15%

Finding FVs

3615.513887

3378.985 3157.93

2951.336

2758.258

1570.884

1468.116

1494.452

1282.309 1198.42

FV22876.20519

PV 8600

MIRR10%

11

BEST CASEProject 0 1 2 3 4 5 6 7 8 9

10

-

1966.6

1966.6

1966.6

1966.6

1966.6

3502.96

3502.96

3502.96

3502.96

3502.96

Discount rate

1774.91

1601.904

1445.762

1304.839

1177.653

1893.203

1708.667

1542.118

1391.803

1256.14

Cash Inflows

15097

Cash Outfl

8600

12

ows

NPV

6496.998

IRR

24%

Finding FVs

3615.514

3378.985

3157.93

2951.336

2758.258

4591.671

4291.282

4368.262

3748.171

3502.964

FV

36364.37

PV

8600

MIRR

16%

Scenarios Best Base Worst

13

Probability 0.25 0.5 0.25

NPV 9383.614 5046.138 337.412

ENPV 4953.3255

Standard Deviation 3199.661777

Co variance 0.645962349

14

CONCLUSIONTo meet the substantial demand of electricity, MGCL has a great scope to expand its business profitably & adding

value to the country as well.

If company obtains debt at 16%, then the company’s ability to cover interest expenses would decrease by 60%. But because the company has been outperforming in the past, banks are willing to give loan at KIBOR rate i.e. 14%. Hence company would face any new risk in paying of its interest expense it won’t affect its credit rating as well.

Earning per share would increase from 7.42 per share to 7.44 per share. The company is currently using 30% dividend payout ratio. The new project is not adding significant risk to the corporation; hence the % of earnings paid as dividends won’t have to be increased. The P/E ration doesn’t have a obvious change either. The new WACC of the company is estimated to be 10.47.

Benefits for MARI GAS

1. Ease of financing: The Company is currently financing from two banks: Bank Al Falah Limited & Habib bank

limited at interest rate of 14.27% %14.66% respectively.

2. WAPDA would be the only customer, so it would be relatively easy to satisfy them.

3. Since MARI Gas would be their own supplier, no premium would be paid on gas.

4. In the agreement with WAPDA, the tariff paid is charged in dollars, so inflation won’t have impact on the

sales.

5. The supply to WAPDA would be on contract basis, so revenue from 25 years would be specified before hand.

Limitations The report is as reliable as accuracy of the data

The government might charge fee to the company for getting into a new venture. Access to this &

relevant knowledge was not possible

15

REFERENCES www.sbp.org.pk www.kse.com.pk www.igisecurities.com.pk/ www.ppib.gov.pk www.wikipedia.org/ www.brecorder.com

16

APPENDIX

Calculation of KAPCO Beta through Pure Play MethodMonths (April, May, June, July)

Date Reuturn on KAPCOReturn on

Market3 6,931.90 46.65 -0.03604 -0.014584 7,191.09 47.34 -0.03253 -0.009215 7,432.88 47.78 -0.01144 0.0046266 7,518.93 47.56 -0.01532 -0.003987 7,635.88 47.75 0.040268 0.0078098 7,340.30 47.38 0.006075 -0.000849 7,295.98 47.42 -0.04227 0.008936

12 7,617.96 47 -0.03233 0.01577713 7,872.49 46.27 0.005061 -0.0092114 7,832.85 46.7 0.003301 0.00755115 7,807.08 46.35 0.017862 0.00281316 7,670.08 46.22 -0.01602 0.00303820 7,794.95 46.08 -0.01361 0.01408521 7,902.48 45.44 0.008723 -0.0065622 7,834.14 45.74 0.034323 0.00815523 7,574.17 45.37 0.032505 0.00220926 7,335.72 45.27 -0.03742 0.00981527 7,620.87 44.83 0.037567 0.01816928 7,344.94 44.03 -0.01146 0.0061729 7,430.08 43.76 0.021837 030 7,271.30 43.76 0.029601 0.16197615 7,062.25 37.66 -0.00276 0.00026614 7,081.83 37.65 -0.01626 -0.0044913 7,198.87 37.82 0.010274 -0.0057812 7,125.66 38.04 -0.00054 0.0050211 7,129.51 37.85 0.000925 -0.01304

8 7,122.92 38.35 -0.02384 0.0028777 7,296.90 38.24 0.007497 -0.007016 7,242.60 38.51 0.014026 0.014756

50 7,142.42 37.95 -0.00491 0.00343740 7,177.64 37.82 0.000668 -0.0026418 7,172.85 37.92 0.014856 0.01580519 7,067.85 37.33 0.00101 -0.0069220 7,060.72 37.59 0.013042 -0.0050321 6,969.82 37.78 -0.02469 -0.0097

17

22 7,146.24 38.15 -0.00381 0.011425 7,173.57 37.72 -0.00046 -0.0222926 7,176.89 38.58 -0.00166 -0.0190727 7,188.84 39.33 -0.01362 0.00203828 7,288.13 39.25 0.001583 0.00589429 7,276.61 39.02 0.009191 -0.0134

1 7,210.34 39.55 0.011962 0.0025352 7,125.11 39.45 0.019338 0.0125773 6,989.94 38.96 0.016254 0.0093264 6,878.14 38.6 -0.00239 0.005475 6,894.62 38.39 0.00038 -0.008788 6,892.00 38.73 -0.02748 -0.003099 7,086.78 38.85 0.005609 0.003098

10 7,047.25 38.73 -0.0063 -0.0157611 7,091.96 39.35 0.005052 -0.0085712 7,056.31 39.69 0.014845 0.00303315 6,953.09 39.57 0.011659 0.0084116 6,872.96 39.24 -0.02868 0.0010217 7,075.93 39.2 0.003426 -0.0125918 7,051.77 39.7 0.00171 -0.0087419 7,039.73 40.05 -0.00248 -0.0079322 7,057.26 40.37 0.00481 0.00447923 7,023.48 40.19 -0.00034 -0.000524 7,025.89 40.21 -0.01444 -0.0096125 7,128.83 40.6 -0.00478 -0.0034426 7,163.04 40.74 -0.01481 -0.06581

1 7,270.72 43.61 -0.03036 -0.034322 7,498.34 45.16 0.003622 -0.008783 7,471.28 45.56 -0.00892 0.0068516 7,538.49 45.25 -0.00144 -0.028557 7,549.37 46.58 0.009799 -0.0038 7,476.11 46.72 0.006205 0.0042999 7,430.01 46.52 -0.00968 0.004101

10 7,502.66 46.33 -0.02368 -0.0049413 7,684.65 46.56 0.006943 0.020381

4 7,631.66 45.63 -0.00709 0.00241715 7,686.15 45.52 -0.00379 -0.0157816 7,715.42 46.25 -0.00626 -0.0043117 7,764.01 46.45 0.006922 0.01308620 7,710.64 45.85 -0.0092 -0.0341321 7,782.23 47.47 -0.00264 0.00105422 7,802.81 47.42 -0.00776 0.00572623 7,863.86 47.15 0.010337 0.002978

18

24 7,783.40 47.01 0.009381 0.00127827 7,711.06 46.95 0.004728 0.01711428 7,674.77 46.16 0.018282 0.00676129 7,536.98 45.85 0.006036 0.01013430 7,491.76 45.39 -0.02968 -0.0132631 7,720.93 46

BETA of KAPCO0.2439

01

19