Power: HUB POWER COMPANY LIMITED - Analysis of Financial Statements Financial Year 2002 - Financial Year 2008
The Hub Power Company (Hubco) operates and maintains an oil-fired thermal plant, with a capacity of 1200 megawatts, the company provides around 6 percent of the country's total electricity production. The company also carries out the business of distribution and sales at different places in Pakistan.
Hubco was established in 1991. It is listed on all the three stock exchanges of the country. Its power plant is operated and maintained under contract by International Power Global Development (IPGD), an independent power producer.
Considering the increasing energy needs of the country, Hubco has planned to establish two new power projects: First, a 220-MW thermal power project in Narowal and second, an 84 MW hydropower project to be built at 8 kilometres downstream from Mangla dam. The establishment of hydropower plant will make Hubco the first IPP to establish a hydropower project.
To achieve timely completion of the hydropower project, Hubco acquired 75% of Laraib Energy Limited shareholdings in the beginning of August 2008. The electricity generated from this hydro project will be supplied to the National Transmission and Dispatch Company Limited (NTDC). The construction is expected to start before the end of the current year and the hydro power plant is expected to be fully operational within 39 months. The Narowal project is expected to start operations on 31st March 2010. The tariff approved by NEPRA is US cents 12.8019 per kWh (PkR 8.0549 per kWh), the tariff was determined on May 23, 2008.
The project is being financed at a 70:30 debt/equity ratio. This suggests that the company doesn't plan to dilute its shareholding and wants to finance its major project through debt financing.
LIQUIDITY ANALYSIS
The liquidity position of Hubco has deteriorated considerably during 2008. The current ratio has fallen from 1.64 in 2007 to 1.04 at the end of 2008. This is mainly because of the rise in short term borrowings (secured) from PkR 2.09 billion in 2007 to PkR 13.33 billion in 2008 this represents a 537.6% increase in short term borrowings, these borrowings owe to the fact that Hubco has financed the Narowal project through these debts. Secondly, borrowings from banks through running finance also represent a major chunk of the rise in short-term debt.
Hubco is one of the major victims of the circular debt. Liquidity problems continued to increase as the amount owed by WAPDA tripled in 2008 as against 2007 and stands at over PkR 27 billion in 2008, of this amount, PkR 22 billion is classified as overdue (payable immediately). The company is in constant communication with WAPDA and government officials to settle these outstanding dues.
The liquidity problems are furthered, because the company owes PkR 12 billion to Pakistan State Oil for RFO supply to its power station. Although the company's obligation to PSO is covered by the stand-by letter of credit provided to PSO under a Fuel Supply Agreement, this has significantly increased the operating costs in 2008.
The WAPDA outstanding has also caused Hubco to increase its Running Finance Facility now totalling PkR 12 billion. The company repaid two tranches of long-term loan facilities of PkR 979 million plus mark-up due in July 2007 and January 2008. Hubco has also repaid its debt obligations of PkR 1.08 billion due in July 2008. These payment trends confirm that Hubco will continue to repay its debts as they arise and if its debtors don't pay Hubco on time then operational and financial costs will raise future liquidity problems.
HUBCO'S PROFITABILITY
The company earned a net profit of PkR 2.6 billion in 2008 which resulted in earnings of PkR 2.25 per share, compared with a net profit of PkR 2.66 billion in 2007. This represents a decrease of 2.26% in profits during 2008 as against last year's profits. Hubco's profits fell rapidly in 2006 and since then profitability has been falling consistently and at a stable rate for the past two years.
Operating costs increased by a phenomenal 140% in 2006 on a YoY (year-on-year) basis due to the rising oil prices in the world market at that time. On the other hand, sales increased by only 64.4% during 2006 as against the 2005 sales figure this is indicative of the fact that the rise in operating costs was far more than the increase in sales hence significantly affecting the bottom line in 2006.
Return on assets at the end of 2008 fell significantly because net profits fell and at the same time total assets increased by 39.3% as against the total assets of the last year. The major increase was in the trade debts category which increased by 213.4% in 2008 against 2007 figure of PkR 7.94 billion, thus causing a non-revenue generating increase in assets.
Hubco's revenues have continued to increase since 2006. The increase is largely due to the continuous rise in oil prices during 2007 and 2008. Although demand for electricity did increase both in the domestic and industrial sectors but the increase in oil prices played a greater role in pushing the price higher paid by the customer. During 2008 revenues increased by 41.5% as compared with the 2007 sales figure. During the year the plant operated at optimal efficiency. It dispatched 7,205 GWh of electricity corresponding to a load factor of 68.40%. The power station maintained high availability of 80% for the full year.
DEBT MANAGEMENT
Financial costs increased by 38.7% during 2008 on a YoY basis. This increase was due to the higher cost of borrowing during the year as State Bank's key rate (interest rate: 13.5%) continued to increase during the first half of 2008. Secondly, Hubco continued to pay its obligations and on some of these obligations Hubco had to pay extra charge because of the delay in payments.
Hubco has extended its Running Finance Facility to PkR 12 billion (MCB Rs 3 billion, NBP, HBL, UBL, and ABL Rs 2 billion each and Bank Al-Habib Rs 1 billion). This is also a reason for the declining TIE ratio. The TIE (times interest earned) ratio fell from 2.88 in June 07 to 2.32 in June 2008.
Long term debt to equity ratio has also declined consistently since 2002. Long term loans fell by around 11.84% during 2008 on a YoY. This is a major reason for decline in the ratio. Debt/equity increased to 1.2 in 2008 this was due to the enormous rise of 114.7% in total liabilities during the year on a YoY basis. The debt position of Hubco has deteriorated because of the rising debt obligations in 2008. Debt to Asset has also increased because of the increase in debts. Total assets during 2008 increased by 39.4%, this increase is less than the increase in debts hence the higher debt to asset ratio.
ASSET MANAGEMENT
The DSO (day sales outstanding) has increased by 78.67 days during 2008 as compared to last year's figure of 64.74 days. This increase is mainly due to delays in receivable payments from Hubco's major customer, WAPDA. Total asset turnover ratio has slightly increased to 1 in 2008 from 0.98 in 2007. The increase is minimal as compared to the rise in previous years mainly because the assets have grown significantly in 2008. Operating cycle increased by 66.77 days in 2008 as against 2007 figure because of the rise in DSO.
Inventory turnover fell to 9.02 days in 2008. This was due to fall in the inventory of the fuel oil to PkR 1.56 billion. Sales-equity ratio fell to 2.19 in 2008 due to increases in sales and also because of a fall in equity of 2%. This fall in equity is on the back of lower profits.
MARKET RATIOS
Earning per share fell slightly to 2.25 in 2008 from 2.29 in 2007. This fall was due to lower profits in 2008. Price earning ratio was slightly higher and recorded an increase of 2.7% in 2008. This was due to the higher average market price of the Hubco stock in 2008. Hubco paid around PkR 3.17 billion in dividends during 2008. This dividend payout was lesser than the previous year causing the dividend per share to fall to PkR 2.74 in 2008 from PkR 3.1 in 2007.
FUTURE OUTLOOK
Pakistan's power demand is likely to increase by a 3-year CAGR of 7.5% and is expected to cross 20,000MWh in FY10. The supply-demand deficit is likely to reach to 5,500MWh in 2010. Oil is an expensive mean of producing electricity and Pakistan has a high import oil bill, it is expected that the power producers will come up with hydro and coal-based power plants. Moreover, Sindh province has huge reserves of coal, so Government of Pakistan is likely to encourage coal-based power plants in the future.
Pakistan has nearly 3.36bn tonnes of proven coal reserves and if 30-40% of these reserves properly utilized then it would be sufficient to generate 100,000MW of electricity for the next 30 years. A key issue in utilizing this coal resource is the fact that Pakistan's coal has the lowest carbon content of just 25-35% this would mean that future coal powered plants will require imported coal, secondly pollution will also be an issue for the GoP. Both of these factors will deter the GoP to offer incentives to power producers who want to set up coal based power projects.
Hubco's plans to build a thermal plant and a hydro power plant are in line with our forecasts. We expected that because of the above mentioned issues with other possible sources of power production building a Hydro power plant would be the right thing to do. Although nuclear power plants are one of the cheapest means of producing electricity currently but nuclear technology is expensive and limited to the developed world. Pakistan can reduce its electricity generation expenditure by a massive US $647,200 per hour if it produces all of its electricity demand (around 16000 MWh) through nuclear power plants. At present the total expenditure of Pakistan on electricity generation is around US $727,200 per hour.
HUBCO is also expected to suffer from liquidity issues going into 2009 and 2010. This is because the reasons for the circular debt issue are structural and unless the government comes up with an appropriate tariff plan and cheaper energy sources and raw materials distributors and producers of electricity will continue to suffer from liquidity crisis. Because WAPDA and other electricity distributors are affected directly by the global oil price shocks it is expected that due to the global financial credit crunch World Oil Prices will remain unstable hence negatively affecting the power sector of Pakistan in the near future.
Hubco is expected to see higher turnover levels though profits can only be sustained or increased if operational and financial costs are controlled both of these figures are affected by raw material costs and cost of borrowing capital respectively. In the current scenario of tight monetary policy and high inflation electricity tariffs are expected to rise but that would not solve the problem of the power sector and the public at large. The power and energy sector needs to come up with long-term viable solutions for the electricity needs of the country. This would mean increased investment in alternative energy sources. At the same time because Pakistan's natural gas resources are declining therefore the GoP needs to support and encourage companies and investors to invest in the nuclear, wind, and hydro power projects to fulfil future energy needs.
=============================================================================================================================
HUB POWER COMPANY LIMITED-KEY FINANCIAL DATA
=============================================================================================================================
Income Statement (Rs '000) Dec'02 Dec'03 Dec'04 Dec'05 Dec'06 Dec'07 Dec'08
-----------------------------------------------------------------------------------------------------------------------------
Total Revenue 21,367,251 19,513,668 16,002,782 16,978,466 27,911,386 44,130,911 62,434,557
Cost of Goods Sold 11,538,638 11,022,007 8,106,637 9,821,498 23,553,045 39967042 57,684,623
General & Administrative Expenses 216,576 213,666 230,628 194,244 280,729 252919 288,770
Operating Profit (EBIT) 10,535,012 8,728,061 7,686,127 7,193,691 4,345,933 4077736 4,566,554
Financial Charges 3,248,565 2,626,275 2,223,163 1,808,242 1,557,496 1417499 1,965,971
Net Income 7,286,447 6,101,786 5,462,964 5,385,449 2,788,437 2654237 2,600,583
-----------------------------------------------------------------------------------------------------------------------------
Balance Sheet (Rs '000) Dec'02 Dec'03 Dec'04 Dec'05 Dec'06 Dec'07 Dec'08
-----------------------------------------------------------------------------------------------------------------------------
Stores & Spares 521,657 521,657 543,782 562,680 592,486 612870 622,972
Cash & Bank Balances 9,196,318 6,478,098 5,803,750 6,038,136 3,363,306 742861 662,226
Total Current Assets 17,496,975 12,945,880 12,472,945 10,971,232 9,593,915 12512840 28,124,200
Total Non Current Assets 46,068,421 42,600,126 39,307,630 35,664,503 33,921,477 32480675 34,572,549
Total Assets 63,565,396 55,546,006 51,780,575 46,635,735 43,515,392 44993515 62,696,749
Total Current Liabilities 13,426,159 10,833,770 8,894,489 4,729,730 4,264,980 7651861 26,919,388
Long Term Liabilities 23,961,796 18,681,642 13,243,975 10,234,193 9,265,207 8289571 7,306,690
Total Liabilities 37,387,955 29,515,412 22,138,464 14,963,923 13,530,187 15,941,432 34,226,078
Share Capital 11,571,544 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 28,470,671
-----------------------------------------------------------------------------------------------------------------------------
LIQUIDITY RATIO Dec'02 Dec'03 Dec'04 Dec'05 Dec'06 Dec'07 Dec'08
-----------------------------------------------------------------------------------------------------------------------------
Current Ratio 1.30 1.19 1.40 2.32 2.25 1.64 1.04
-----------------------------------------------------------------------------------------------------------------------------
ASSET MANAGEMENT Dec'02 Dec'03 Dec'04 Dec'05 Dec'06 Dec'07 Dec'08
-----------------------------------------------------------------------------------------------------------------------------
Inventory Turnover(Days) 28.16 33.02 34.05 26.53 24.39 20.91 9.02
Day Sales Outstanding (Days) 59.03 32.23 42.30 30.62 37.90 64.74 143.41
Operating Cycle (Days) 67.82 41.85 54.53 42.55 45.54 85.66 152.43
Total Asset turnover 0.34 0.35 0.31 0.36 0.64 0.98 1.00
Sales/Equity 0.82 0.75 0.54 0.54 0.93 1.52 2.19
-----------------------------------------------------------------------------------------------------------------------------
DEBT MANAGEMENT Dec'02 Dec'03 Dec'04 Dec'05 Dec'06 Dec'07 Dec'08
-----------------------------------------------------------------------------------------------------------------------------
Debt to Asset(%) 58.82 53.14 42.75 32.09 31.09 35.43 54.6
Debt/Equity (Times) 2.43 2.13 1.75 1.47 1.45 1.55 1.2
Times Interest Earned (Times) 3.24 3.32 3.46 3.98 2.79 2.88 2.32
Long Term Debt to Equity(%) 91.54 71.77 44.68 32.31 30.90 28.53 25.66
-----------------------------------------------------------------------------------------------------------------------------
PROFITABILITY (%) Dec'02 Dec'03 Dec'04 Dec'05 Dec'06 Dec'07 Dec'08
-----------------------------------------------------------------------------------------------------------------------------
Gross Profit Margin 46.00 43.52 49.34 42.15 15.61 9.45 7.61
Net Profit Margin 34.10 31.27 34.14 31.72 9.99 6.01 4.17
Return on Asset 11.46 10.99 10.55 11.55 6.41 5.90 4.15
Return on Common Equity 27.83 23.44 18.43 17.00 9.30 9.14 9.13
-----------------------------------------------------------------------------------------------------------------------------
PER SHARE Dec'02 Dec'03 Dec'04 Dec'05 Dec'06 Dec'07 Dec'08
-----------------------------------------------------------------------------------------------------------------------------
Earning per share 6.30 5.27 4.72 4.65 2.39 2.29 2.25
Price earning ratio 4.52 7.57 7.29 6.25 10.29 0.00 14.35
Dividend per share 7.89 6.89 3.70 2.90 3.84 3.10 2.74
Book value 22.62 22.50 24.02 24.37 25.91 25.11 24.60
=============================================================================================================================
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].
Comments
Comments are closed.