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. It also carries out the business of distribution and sale at different places in Pakistan.
Hubco was incorporated in Pakistan in 1991; it is listed on Karachi, Lahore and Islamabad stock exchanges. The power plant is operated and maintained under the contract by International Power Global Development (IPGD), an independent power producer.
Considering the rapid growth of energy needs of the country in the industrial and domestic sector, Hubco has plans for two new energy sector projects, first, to establish a 220-MW thermal power project at Narowal in Punjab, second, an 84-MW hydropower project to be built at 8 kilometres downstream from Mangla Dam.
The establishment of the hydropower plant will make Hubco the first IPP to establish a hydropower project. To achieve the timely completion of the hydropower project, Hubco acquired 75% of Laraib Energy Limited (LARAIB) 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).
Hubco expects to start construction before the end of the current year and the hydro power plant is expected to be fully operational within the next 39 months. The Narowal thermal project is expected to start operations on 31st March 2010. It has achieved financial close during March 2009.
The tariff approved by NEPRA is US cents 12.8019 per kWh (Rs 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.
RECENT RESULTS 3Q09 Turnover for the period was Rs 67,355 million (2008: Rs 42,752 million) and operating costs were Rs 62,553 million (2008: Rs 39,219 million) resulting a gross profit of Rs 4,802 million compared to Rs 3,532 million in the corresponding period last year.
Turnover was higher due to higher prices while the operating costs were higher mainly on account of higher fuel prices. The company's net profit increased to Rs 2,965 million resulting in earnings per share of Rs 2.56 compared to a net profit of Rs 1,992 million and earnings per share of Rs 1.72 in the same period last year.
The increase in profit is attributable to currency devaluation, efficiency gains, higher tariff profile and lower repair and maintenance expenses. Like most companies in the energy sector, the trade dues as well as trade receivables have swelled. Circular debt plagues Hubco as well despite the government's move of issuing of Rs 70bn TFCs in order to manage the issue. Hubco received Rs 35.458 billion from WAPDA through the circular debt settlement arranged by the Federal Government.
From this and in accordance with the settlement procedure Rs 30.156 billion was released to PSO in settlement for the fuel oil supply to the Hub Power Station. As of the date of the 3Q09 report an amount of Rs 35 billion is outstanding against the WAPDA. Meanwhile Hubco currently owes Rs 32 billion to Pakistan State Oil for fuel supplied to its power station.
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 Rs 2.09 billion in 2007 to Rs 13.33 billion in 2008 this represents a 537.6% increase in short-term borrowing.
These borrowings owe to the fact that Hubco has financed the Narowal project through these debts. Secondly, the 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 circular debt. Liquidity problems continued to increase, as the amount owed by WAPDA tripled in 2008 as against 2007 and stands at over Rs 27 billion in 2008. Of this amount Rs 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 Rs 12 billion to Pakistan State Oil for RFO supply to the power station. Although the company's obligation to PSO is covered by the stand-by letter of credit provided to PSO under Fuel Supply Agreement, though, this has significantly increased the operating costs in 2008.
WAPDA's outstanding has also caused Hubco to increase its running finance facility now totalling Rs 12 billion. The company repaid two tranches of long-term loan facilities amounting to Rs 979 million plus mark-up that were due in July 2007 and January 2008.
Hubco has also repaid its debt obligation amounting to Rs 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 the future liquidity problems for Hubco.
PROFITABILITY The company earned a net profit of Rs 2.6 billion in 2008 which resulted in earnings of Rs 2.25 per share, compared with a net profit of Rs 2.66 billion in 2007. This represents a decrease of 2.26% in profits during 2008 as against last year's profits.
Hubco's profitability 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 the year 2006 on a YoY (year-on-year) basis.
This was mainly 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 the 2007 figure of Rs 7.94 billion. 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, the Hubco continued to pay its obligations and on some of these obligations the company had to pay extra charge due to the delay in payments. Hubco has extended its running finance facility to Rs 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 08. 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 the 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 the last year's figure of 64.74 days. This increase is mainly due to the 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 assets have grown significantly in 2008. Operating cycle increased by 66.77 days in 2008, as against the 2007 figure because of the rise in DSO. Inventory Turnover fell to 9.02 days in 2008.
This was due to the fall in the inventory of fuel oil to Rs 1.56 billion. Sales-equity ratio fell to 2.19 in 08 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 RATIO ANALYSIS 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 Rs 3.17 billion in dividends during 2008. This dividend payout was lesser than the previous year causing the dividend per share to fall to Rs 2.74 in 2008 from Rs 3.1 in 2007.
FUTURE OUTLOOK Pakistan's power demand is likely to increase by a 3year 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. Fuel oil is an expensive mean of producing electricity and because Pakistan has a high import oil bill, it is expected that power producers will come up with hydro and coal based power plants.
Moreover Pakistan's Sindh province has huge reserves of coal so Government of Pakistan (GoP) is likely to encourage coal based power plants in the future. Pakistan has nearly 3.36bn tons of proven coal reserves and if 3-40% of these reserves are properly utilized then it would be sufficient to generate 100,000MW of electricity for 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 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.
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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 Dec'08
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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
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Balance Sheet (Rs '000) Dec'02 Dec'03 Dec'04 Dec'05 Dec'06 Dec'07 Dec'08
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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
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LIQUIDITY RATIO Dec'02 Dec'03 Dec'04 Dec'05 Dec'06 Dec'07 Dec'08
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Current Ratio 1.30 1.19 1.40 2.32 2.25 1.64 1.04
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ASSET MANAGEMENT Dec'02 Dec'03 Dec'04 Dec'05 Dec'06 Dec'07 Dec'08
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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
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DEBT MANAGEMENT Dec'02 Dec'03 Dec'04 Dec'05 Dec'06 Dec'07 Dec'08
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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
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PROFITABILITY (%) Dec'02 Dec'03 Dec'04 Dec'05 Dec'06 Dec'07 Dec'08
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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
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PER SHARE Dec'02 Dec'03 Dec'04 Dec'05 Dec'06 Dec'07 Dec'08
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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
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