Hubco:- HUB POWER COMPANY LIMITED - Analysis of Financial Statements Financial Year 2002 - Financial Year 2007
The Hub Power Company is a large, private sector power company and its 1,200mw plant is located 60 km from Karachi in Hub. Hubco generates electricity by four 323mw oil-fired units that are supplied by a 78km long pipeline from Pakistan State Oil.
The Hub is the first and largest power station to be financed by the private sector in Southern Asia and one of the largest private power projects in Pakistan. The Hub power station was the first project to be successfully co-financed by several governments, the World Bank as well as international private sector lenders and investors. Hubco is listed on Karachi, Lahore, Islamabad and Luxembourg stock exchanges and has over 17,000 Pakistani and international shareholders. The principal activities of the company are to own, operate and maintain an oil-fired power station with a net capacity of 1200mw located at the Hub River estuary in Balochistan. Its sole customer is Wapda (Water and Power Development Authority).
The company earned a net profit of Rs 733 million during the quarter resulting in earnings per share of Rs 0.63, compared to a net profit of Rs 526 million and earnings per share of Rs 0.45 in the corresponding quarter last year. The increase in profit is mainly because of higher electricity generation in the year ending December 2007, resulting in a generation bonus under the Power Purchase Agreement (PPA). However, the turnover increased by about 1.5 times from the last quarter of 2006 whereas the costs increased by a greater amount, the company still managed to earn greater profit. From June 2007 to December 2007, the short term borrowings of the firm have experienced a four-fold increase. This may be expected due higher level of operations that the company maintained during the last quarter ending December.
The only operating costs that saw a major increase from the quarter of last year was the fuel cost. This may be said to be a consequence of the rising fuel prices, peaking demand and the resultant shortages in the country. The maintenance costs also slightly increase on account of the overhaul of a major unit that is expected to resume function by the end of February.
The plant in the period under review operated at a load factor of 62% and has always capitalized on its high load factor. This trend reinforces the fact that it has maintained its position as one of the best performers in the industry. The trade debts of the company are secured and include an amount that is still due from Wapda. Wapda may not have been able to clear its dues, as it is also not able to collects its dues from companies such as KESC.
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Qtr, Dec.2007 Qtr, Dec.2006
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Turnover 13,595,150 8,001,073
Operating costs 12,335,276 7,105,532
Fuel costs 11,188,234 6,136,144
Gross Profit 1,259,874 895,541
Financial charges 471,381 354,185
Profit After Tax 732,706 526,049
EPS 0.63 0.45
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Dec.2007 Jun-07
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Current assets 18,535,417 1 2,512,840
Inventory-fuel oil 2,450,139 2,563,757
Trade debts 13,730,044 7 ,936,783
Current liabilities 14,556,236 7 ,651,681
Short term borrow 8,952,813 2 ,090,000
Equity 28,540,645 29,052,263
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Analysis of Financial Performance June HY'02-HY'07
LIQUIDITY RATIOS:
The current ratio of the company reached its peak in 2005 but has witnessed a decline in the subsequent years. Hubco paid-off significant amount of long-term loan in FY04 onwards, allocating more current assets for per unit of current liability. Its cash balances have therefore decreased quite tremendously. In addition, Wapda is delaying its release of payments that is posing some liquidity problems for the company. The company continues to discharge its liabilities as they become due. During the year, the company repaid two ranches of long-term loan facilities amounting to Rs 979 million that were due in July 2006 and January 2007.
Profitability ratios
Hubco has been able to capitalize on its increasingly high load factor and high capacity. In addition to this, Hubco has remained a consistent high performer in the industry. The manifestation of efficiency amidst the competitive industrial and economic scenario can be seen in net profit and gross profit margin trends. However, the downturns in the trend are attributable to the uncontrollable risks such as interest rate risk, price risks etc.
Both the turnover and the operating costs were higher in 2007 mainly on account of higher electricity generation. The electricity generation doubled from last year's.
As can be seen the annual capacity of the plant has increased over the years. In FY07, the energy output increased substantially owing to high load factor load and operation and maintenance of the power plant as per the international standards. Increased demand for power also fuelled better sales revenue for the company and the company dispatched 7214 GWhs of electricity corresponding to the load factor of 68.6%. Financing costs also decreased owing to retirement of debt. However, the overall decline in profits is due to higher operating costs because of higher load factor.
DEBT MANAGEMENT RATIOS:
Hubco's major financing comes through the acquisition of long-term debt. The company continues to allocate funds on various capital expenditure projects such as up gradation, procurement of parts etc. However, a striking feature of the company is the efficient payment of the loan. This along with the rising equity has kept the long-term debt to equity ratio low. In fact, all the debt ratios have been showing a decreasing trend over the years owing to the same reason. The company also retired its two major loans this year that further decreased the debt ratios. The decrease in the financial charges have been for the same reason. The interest paying ability of the company have also been improving in the recent years. The company has obtained a running finance facility from National Bank, Standard Chartered and MCB of Rs 6 billion.
ASSET MANAGEMENT RATIOS:
Soaring demand for electricity along with expansion has enabled Hubco to post a healthy inventory turnover ratio trend. The operating cycle is erratic and mainly led by wavering trend of DSO. This means that the company takes a considerable amount of time in recovering its receivables.
Higher demand and increased generation capacity of the company has given an upthrust to sales and net income of the company over the years, resulting in higher total asset turnover of the company. Because of the rising power demand and better incentives in the Budget'08, the company will be better able to capitalize on its efficiency in augmenting its overall asset management ability. Sales-to-equity ratio has also posted an increasing trend mainly because of high sales revenue backed by higher demand for electricity. The company has also obtained running finance facility from three banks to enable it to continue supplying uninterrupted power to the country.
MARKET VALUE RATIOS:
The earnings per share of the company declined due to decrease in net income. The price to earnings ratio on the other hand has increased due to a higher market price. Relatively less number of subscribers enjoy large share in the company's stockholder equity. The dividend per share has decreased as the company is retaining its profits to meet its liabilities and to finance its expansion.
FUTURE OUTLOOK:
The demand for power in the country is on the rise and would go up in the future. Oil has already surpassed the level of $100 and is likely to further rise in the future. Moreover, concerns over the shortage of oil and gas supplies have already gripped the industrial economy. Increase in industrial activity, purchase of air conditioners by the domestic consumers and other electrical appliances increased the power demand, which may add to higher fuel costs of the firm. However, the firm seems well poised to counteract this scenario. With the current maintenance going on for its units, the company is likely to have an increased electricity generation and load factor in the future coupled with possibly a high turnover.
The impact of the budget 07-08 will be positive in the long term since the government has announced mega projects namely construction of Neelum Jehlum dam, Bhasha Diamer Dam. Some of these projects are currently underway. The successful completion of the projects will help overcome the power shortages. Out of the total PSDP allocation, power sector will get Rs 84 billion. An amount of Rs 73 billion outside the PSDP has been allocated to the sector.
Moreover, reduction of customs duty from 40% to 35% has been proposed on industrial diesel power generating units. New power policy will be announced soon. This will have an augmented effect on the company's financials. Plans have also been made to accelerate the exploration of indigenous coal while the import of coal in the short run for the power sector will be encouraged.
An allocation of Rs 60 billion including foreign aid of Rs 30 billion has been made for the power sector for 2007-08.
One more favourable step announced in the budget is the subsidy of Rs 98 billion to Wapda and KECS to improve their financial health. This is positive for the sector as a whole as well as for Hubco since in the previous years cash flow problems of Wapda and KESC tended to spillover onto power producers. Hence, the payment of dues by Wapda to Hubco will reflect positively on the company's financials.
The running finance facility acquired by the company is likely to help its achieve its aim of providing an uninterrupted power supply to the country. This would increase its sales and revenue and help ease its liquidity position.
In accordance with the company's initiative to develop new projects, the company received an approval from the Federal Government for a 225 MW RFO fired power plant at Narowal that is anticipated to be inaugurated in 2010. The company is presently working towards this. The board has also approved Rs 733 million for this purpose. Hubco has also initiated discussions with many lenders for an optimal financing plan. This will enable Hubco to better meet its obligations and achieve a higher profitability in the coming years. Moreover, it will also ease out problems occurring due to delayed payments of Wapda.
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HUB POWER COMPANY LIMITED-KEY FINANCIAL DATA
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Income Statement (Rs '000) Dec'02 Dec'03 Dec'04 Dec'05 Dec'06 Dec'07
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Total Revenue 21,367,251 19,513,668 16,002,782 16,978,466 27,911,386 44,130,911
Cost of Goods Sold 11,538,638 11,022,007 8,106,637 9,821,498 23,553,045 39967042
General & Administrative Expenses 216,576 213,666 230,628 194,244 280,729 252919
Operating Profit (EBIT) 10,535,012 8,728,061 7,686,127 7,193,691 4,345,933 4077736
Financial Charges 3,248,565 2,626,275 2,223,163 1,808,242 1,557,496 1417499
Net Income 7,286,447 6,101,786 5,462,964 5,385,449 2,788,437 2654237
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Balance Sheet (Rs '000) Dec'02 Dec'03 Dec'04 Dec'05 Dec'06 Dec'07
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Stores & Spares 521,657 521,657 543,782 562,680 592,486 612870
Cash & Bank Balances 9,196,318 6,478,098 5,803,750 6,038,136 3,363,306 742861
Total Current Assets 17,496,975 12,945,880 12,472,945 10,971,232 9,593,915 12512840
Total Non Current Assets 46,068,421 42,600,126 39,307,630 35,664,503 33,921,477 32480675
Total Assets 63,565,396 55,546,006 51,780,575 46,635,735 43,515,392 44993515
Total Current Liabilities 13,426,159 10,833,770 8,894,489 4,729,730 4,264,980 7651861
Long Term Liabilities 23,961,796 18,681,642 13,243,975 10,234,193 9,265,207 8289571
Total Liabilities 37,387,955 29,515,412 22,138,464 14,963,923 13,530,187 15,941,432
Share Capital 11,571,544 11,571,544 11,571,544 11,571,544 11,571,544 11,571,544
Total Equity 26,177,441 26,030,594 29,642,111 31,671,812 29,985,205 29052263
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LIQUIDITY RATIO Dec'02 Dec'03 Dec'04 Dec'05 Dec'06 Dec'07
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Current Ratio 1.30 1.19 1.40 2.32 2.25 1.64
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ASSET MANAGEMENT Dec'02 Dec'03 Dec'04 Dec'05 Dec'06 Dec'07
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Inventory Turnover(Days) 8.79 9.62 12.23 11.93 7.64 17.21
Day Sales Outstanding (Days) 59.03 32.23 42.30 30.62 37.90 64.74
Operating Cycle (Days) 67.82 41.85 54.53 42.55 45.54 85.66
Total Asset turnover 0.34 0.35 0.31 0.36 0.64 0.98
Sales/Equity 0.82 0.75 0.54 0.54 0.93 0.00
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DEBT MANAGEMENT Dec'02 Dec'03 Dec'04 Dec'05 Dec'06 Dec'07
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Debt to Asset(%) 58.82 53.14 42.75 32.09 31.09 35.43
Debt/Equity (Times) 2.43 2.13 1.75 1.47 1.45 1.55
Times Interest Earned (Times) 3.24 3.32 3.46 3.98 2.79 2.88
Long Term Debt to Equity(%) 91.54 71.77 44.68 32.31 30.90 28.53
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PROFITABILITY (%) Dec'02 Dec'03 Dec'04 Dec'05 Dec'06 Dec'07
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Gross Profit Margin 46.00 43.52 49.34 42.15 15.61 9.45
Net Profit Margin 34.10 31.27 34.14 31.72 9.99 6.01
Return on Asset 11.46 10.99 10.55 11.55 6.41 5.90
Return on Common Equity 27.83 23.44 18.43 17.00 9.30 9.14
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PER SHARE Dec'02 Dec'03 Dec'04 Dec'05 Dec'06 Dec'07
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Earning per share 6.30 5.27 4.72 4.65 2.39 2.29
Price earning ratio 4.52 7.57 7.29 6.25 10.29 0.00
Dividend per share 7.89 6.89 3.70 2.90 3.84 3.10
Book value 22.62 22.50 24.02 24.37 25.91 25.11
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COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
DISCLAIMER: No reliance should be placed on the [above information] by any one for making any financial, investment and business decision. The [above information] is general in nature and has not been prepared for any specific decision making process. [The newspaper] has not independently verified all of the [above information] and has relied on sources that have been deemed reliable in the past. Accordingly, the newspaper or any its staff or sources of information do not bear any liability or responsibility of any consequences for decisions or actions based on the [above information].
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