Power: HUB POWER COMPANY LIMITED - Analysis of Financial statements Financial Year 2002 - H 2001 2009

Hub Power Company Limited (Hubco) was incorporated in Pakistan on August 1, 1991 as a public limited company under the Companies Ordinance, 1984. Its shares are listed on all the three stock exchanges of the country and its Global Depository Receipts are listed on Luxembourg Stock Exchange. The principal activities of the company are to own, operate and maintain an oil-fired power station with four generating units with an installed net capacity of 1200mw. The power station is in Hub, District Lasbella, (Balochistan); the company also carries out the business of power generation, distribution and sale at other places in Pakistan.

FINANCIAL PERFORMANCE - 1H09

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THE HUB POWER COMPANY LIMITED

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PROFIT AND LOSS ACCOUNT (UNAUDITED)

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                                      3 months     6 months     3 months     6 months

                                         ended        ended        ended        ended

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Note                                 Dec. 2008    Dec. 2008    Dec. 2007    Dec. 2007

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                                                     (Rs  '000s)

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Turnover                            21,584,373   49,699,484   13,595,150   26,786,384

Operating costs                    -19,939,960  -46,732,254  -12,335,276  -24,421,774

GROSS PROFIT                         1,644,413    2,967,230    1,259,874    2,364,610

Other income                            20,480      113,374       17,149       31,872

General and administration

 expenses                              -77,974     -158,500      -72,936     -138,004

Finance costs                         -597,432   -1,230,860     -471,381     -918,649

Workers' profit participation fund

PROFIT FOR THE PERIOD                  989,487    1,691,244      732,706    1,339,829

Basic and diluted earnings

 per share (PKR)                          0.86         1.46         0.63         1.16

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Hubco's turnover increased by 85.5% in the first half of 2009 compared to sales in corresponding period last year. The higher sales are a result of higher electricity generation in the calendar year ending December 2008 resulting in a higher generation bonus compared to the corresponding period last year. Profits are up 26.2% in the first half of 2009 compared with the corresponding period last year. This is due to lower repair and maintenance cost and higher electricity generation.
Financial costs rose by almost 34% during the 1st H09 against financial costs in corresponding period last year. This increase was because of rise in short-term borrowings for Narowal Project and Laraib's acquisition. Short-term borrowings were also higher on account of the continued saga of the circular debt where by at the end of 1st H09 Wapda owed around Rs 47 billion to Hubco as trade debt.
The average industry net profit margin in 2008 was extremely admirable considering the difficult situation, the economy was facing. Hubco's net profit margins were slightly less impressive than the industry margins because Kapco's profits were very good otherwise Hubco was the second best in the industry in terms of profitability. Hubco's net profit margin declined in the 1st half of FY09 to 3.4% from 4.17% in FY08. This decline is because of higher financial costs and a rise in residual fuel oil cost by more than Rs 22 billion in the 1st H09 compared with the corresponding period last year.
The liquidity position of the company remained stable on paper, as the current ratio was 1.00 at the end of the first half of FY09. The same ratio was 1.04 at the end of FY08. There has been a huge increase in the trade debts of Hubco. At the end of 1st H09 trade debts were Rs 53.2 billion from Rs 24.8 billion at the end of FY09. This increase represents a 121% rise in trade debts. The major debtor of Hubco remains Wapda as it failed to meet its obligations to pay Hubco under the Power Purchase Agreement. Hubco has managed to maintain its liquidity position by increasing its current liabilities as trade and other payables rose to Rs 43.3 billion at the end of 1st H09 as against Rs 11.7 billion at the end of FY08. The main creditor of Hubco is PSO (Pakistan State Oil).
During the period under review, the Hub Power Plant operated at an average load factor of 76% and an average complex availability (ACA) of 84%. Electricity sold to WAPDA was 4,020 GWh. Inventory of fuel oil declined from Rs 1.56 billion at the end of FY08 to Rs 1.07 billion at the end of the 1st H09. This decline caused the inventory turnover (days) to decline to 7.73 in the 1st H09.
Debt to asset percentage has increased from 54.6 (FY08) to 68.3 (1stH09). The ratio increased because of a rise in total liabilities by 107.4% during the 1st H09 against the figure of Rs 26.9 billion at the end of FY08. Long-term debt to equity percentage remained consistent as the change in figure was by less than 1.5%. This was due to no change in the equity structure of the company.
Hubco's book value per share increased from Rs 24.6 at the end of FY08 to Rs 25.07 at the end of 1st H09. During the period an interim dividend of Rs 1.35 per share was declared. Hubco's price earning ratio for the period was 15.64.
FUTURE OUTLOOK
In the beginning of calendar year 2009, President Asif Ali Zardari ordered the Ministry of Finance to clear the circular debt crisis in the power sector by the end of Jun 2009. Subsequently, in early April 2009, Hubco received Rs 35.458 billion from Wapda and paid Rs 30.156 billion to PSO. Currently after this payment we expect that receivables against Wapda is estimated at Rs 28 billion, while Hubco has to pay Rs 24 billion to PSO against the supply of furnace oil. We expect this debt crisis to be resolved some were in mid august.
Hubco achieved the financial close of its Narowal 225 megawatts RFO fired project in the second week of March 2009. Moreover it is expected that Hubco's subsidiary Laraib Energy Limited (LEL's) 84MW Hydro Project will achieve financial close by May 2009.
The power sector of Pakistan is expected to grow at a substantial pace over the next two-three years with many projects coming online. Hubco is a major IPP and therefore this growth will affect its market share in the power sector. The power sector of the country is dominated by government-owned companies, which caused the circular debt crisis and continue to pose a threat for the future investment by private companies and further expansion by existing ones. Pakistan also faces the problem of proper infrastructure for power distribution which, has led to theft and inefficient distribution in the past. Recently one of Hubco's units also closed because of technical problems this also signals towards a deterioration of assets in the power sector, which might need to be replaced to ensure consistent flow in the future.
Despite these problems, Pakistan remains a highly attractive market for power producers. Rising aggregate demand even in times of global recession and increasing real GDP indicate that the country's power needs will continue to rise over the next few years.
The depressed situation of Karachi Stock Exchange has caused the value of Hubco's share to trade below its book value for some time though the company has strong fundamentals we expect the stock's value to increase as economic activity picks up.
COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
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Copyright Business Recorder, 2009