Hub Power Company Limited

Financial Analysis Report

Period coverage: 1st July 2011 to 30th June 2012
By Dr. Babur Zahiruddin Raza, Folio No. 04705 / 7472
Shareholder of HUBCO Limited

Prepared and Presented by:

Dr. Babur Zahiruddin Raza,
Corporate Office
Consultant In Human Resources & Master Trainer in H.R Applications
Research Consultant

Mr. Jabran Saroiya

IT Consultant

Mr. Raheel Rustam

Ph: 051-5584905, 5792836

Cell: 0332 4923235
Email: baburzahiruddin@yahoo.com,

FINANCIAL ANALYSIS OF HUB POWER COMPANY LIMITED-Year ended 30-06-2012

TABLE OF CONTENTS

SR no

Description

Page no

Financial analysis approach -------------------------------------------------

Key discussion points for AGM---------------------------------------------- 7

FINANCIAL ANALYSIS OF HUB POWER COMPANY LIMITED-Year ended 30-06-2012

1. FINANCIAL ANALYSIS APPROACH

We have tried to perform holistic and integrated financial analysis of HUBCO with the help
of environmental analysis, industry analysis, company operational review and annual
report.
1.1 Flow chart of analysis approach

Environmental analysis

Industry analysis

Operational review of HUBCO

Financial analysis

2.2 Requisite essential documents for financial analysis

The under mentioned documents are essential to perform comprehensive analysis of
financial position, performance and cash position of Hub Power Company Limited

FINANCIAL ANALYSIS OF HUB POWER COMPANY LIMITED-Year ended 30-06-2012

1.
2.
3.
4.
5.

Financial plan-Year 2011 to 2015

Audited financial statements-Year 2012
Internal audit reports
Management letter /. Letter of internal control from external auditors
Minutes of board meetings

3. Environment analysis
Power generation is provided by three sources; thermal, hydel and nuclear. There
are 13hydroelectric facilities with installed capacity of 6,481 MW are owned and
operated by the WAPDA while thermal power plants are owned by both public and
private sector companies. The public sector operates 13 thermal power plants with
installed capacity of 4,900 MW. One third of power generation is provided by
Independent Power Producers-IPPs. KESC operates plants with total capacity of
1,955 MW.
Out of total 19,252 MW of the National installed generation capacity, dependable
generation is about 17,523 MW in the summer and 14,640 MW in winter.
Independent power producer companies contribute approximately 25% of total
power generation
4. INDUSTRY ANALYSIS
We have applied the porters five competitive forces model to analyze the Electricity
industry and its details are stated as under
4.1 Industry competitors
1
2
3
4
5
6
7
8
9
10
11
12
13

Altern Energy Limited

Ideal Energy Limited
Japan Power Generation Limited
Karachi Electric Supply Company Limited
Kohinoor Energy Limited
KOT ADDU Power Company Limited
Nishat Chunian Power Company Limited
Nishat Power Limited
Pakgen Power Limited
S.G Power Limited
Sitara Energy Limited
Southern Electric Power Company Limited
Tri-Star Power Company Limited

FINANCIAL ANALYSIS OF HUB POWER COMPANY LIMITED-Year ended 30-06-2012

4.2 Threat of new entrants

Flexible requirements for entry in electricity industry
4.3 Threat of substitutes
At present, the substitute of electricity is not available for consumers
4.4 Bargaining power of suppliers
The bargaining power of fuel suppliers named as PSO is relatively strong
4.5 Bargaining power of customers
The bargaining power of Company only two customers (WAPDA and National
Transmission and Distribution Company) are strong.
5.CORPORATE AND OPERATIONAL REVIEW OF HUBCO
5.1. Ownership structure
SR
No
1
2
3
4
5
6
7
8
9
10
11
12

Categories
Individuals
Joint stock companies
Financial institutions
Investment companies
Insurance companies
Modaraba / Mutual Funds / Leasing
Companies
Government of Balochistan
GDR Depository
Charitable Trusts
Cooperative societies
Provident/ Pension / Gratuity fund
EOBI
Total

Number of
shareholders
12,444
174
72
23
17
66
1
1
36
11
134
1
12,980

Number of
% age
shares
194,926,797
16.84
359,361,594
31.06
336,977,142
29.12
40,012,594
3.46
55,002,081
4.75
58,227,324
5.03
358,607
13,724,741
10,991,852
4,590,500
63,331,155
19,650,000
1,157,154,387

5.2 Strategic direction; Vision, Mission and objectives

FINANCIAL ANALYSIS OF HUB POWER COMPANY LIMITED-Year ended 30-06-2012

0.03
1.19
0.95
0.40
5.47
1.70
100.00

Vision: To be an energy leader - committed to deliver growth through energy.

Mission statement: To be a growth oriented-energy company that achieves the highest
international standards in its operations and delivers a fair return to its shareholders,
while serving the community as a caring corporate citizen.

Overall strategic objectives

A.
B.
C.
D.

To promote energy efficiency,

To develop renewable energy,
To introduce and maintain environmentally efficient technologies,
To be a major player in the Country's power sector.
.
5.3 Operational review
The Hub Power Company Limited (the Company) was incorporated in Pakistan on August
1, 1991 as a public limited company under the Companies Ordinance, 1984 and
commenced commercial operations in March 1997. The shares of the Company are listed
on the Karachi, Lahore and Islamabad Stock Exchanges and its Global Depository Receipts
are listed on the Luxembourg Stock Exchange.
The principal activities of the Company are to develop, own, operate and maintain power
stations. The Company owns an oil-fired power station with an installed net capacity of
1,200 MW at Mouza Kund, Hub in Baluchistan and an installed net capacity of 214 MW oilfired power station at Mouza Poong, Narowal in Punjab. The Company also has a 75%
controlling interest in Laraib Energy Limited, a subsidiary company that is developing an
84 MW hydel power plant near the New Bong Escape, 8 km downstream of Mangla Dam in
Azad Kashmir.
5.4 HUB PLANT capacity and Production
Maximum theoretical capacity
Total output
Load factor

2012
10,541GWh
7,770 GWh
74%

2011
10,512 GWh
8,115 GWh
77%

2012
1,878 GWh

2011
359 GWh

5.5 NAROWAL PLANT capacity and Production

Maximum theoretical capacity

FINANCIAL ANALYSIS OF HUB POWER COMPANY LIMITED-Year ended 30-06-2012

Total output
Load factor

1,321 GWh
70%

237 GWh
66%

Key discussion points for AGM

Page 41 of annual report
Point no 1: Reasons behind disinvestment decision of sponsoring shareholders
The chairman review reveals the fact that XENEL INDUSTRIES and INTERNATIONAL POWER have
taken disinvestment decision during the year ended 30th June 2012 under section 76 of
Companies Ordinance 1984
We would like to know the underlying reasons of disinvestment of sponsoring shareholders and
I also need certified updated copy of register under section 150 (2) of Companies Ordinance
1984
Page 62 of annual report
Point no 2: Reason of resignation of directors
Mr. Robin A. Bramley, Mr. Malcolm P. Clampin and Mr. Philippe F. A. L. Salmon resigned on
June 13, 2012.
As per section 180 of Companies Ordinance 1984, A director elected under section 178 may
hold office for 3 years until and unless he gives resignation or becomes disqualified under
section 187 and / or section 188.
The board of directors suppose share the reasons of their resignation and ramification of
their departure on the governance mechanisms of HUBCO.

Page 47 Annual Report

FINANCIAL ANALYSIS OF HUB POWER COMPANY LIMITED-Year ended 30-06-2012

Point no 3: Financial sustainability of HUBCO

The gearing ratio 48:52 reveal the fact that solvency position of HUBCO has been deteriorating
and it may have adverse affect on the financial sustainability / going concern assumption.

------------------------------------------------------------------------------------------------------------------------------Page 49,51,74,76 Annual Report

Point no 4: Application of ISA 570: Going Concern
In the light of under mentioned facts and figures, the disclosure of existence of material
uncertainty pertain to going should be mentioned in the notes to financial statements of
HUBCO under paragraph 18 of ISA 570. Moreover, material uncertainty should be stated in the
emphasis of matter paragraph as per paragraph 19 of ISA 570 and ISA 706
A.
B.
C.
D.
E.
F.

Trade receivable-WAPDA : PKR 133.000,000,000

Trade receivable-NTDC : PKR 18,000,000,000
Trade payables-PSO: PKR 123,000,000,000
Cash and Bank Balances: PKR 497,031,000
Short term borrowings: PKR 19,688,469,000
Finance cost: PKR: PKR 7,082,790,000

Page 18, 20 and 21 of Annual Report

Point no 6: Poor Financial Stewardship
The below comparative analysis of 6 years reflects poor financial stewardship of Company
resources.
2012

2011

2010

2009

2008

46.6 billion

24.8 billion

2007

Rupees
Trade
debts

151.1 billion

85.8 billion

66.7 billion

FINANCIAL ANALYSIS OF HUB POWER COMPANY LIMITED-Year ended 30-06-2012

7.9 billion

Sales
Finance
cost

174.7 billion

123.3 billion

99.6 billion

82.7 billion

62.4 billion

44.1 billion

7 billion

3.3 billion

1.7 billion

2 billion

1.9 billion

1.4 billion

The above mentioned facts highlight the non-correlation among profitability, liquidity and
solvency position of Hub Power Company Limited.

Page 63 of Annual Report

Point no 7: Provision for doubtful debts
The closing paragraph of statutory report of directors under section 236 of Companies
Ordinance 1984 disclose the critical financial situation in the following words
The Company at present is operating under a very difficult and challenging scenario
since trade receivables as at end of the year are over Rs 151 billion. Unfortunately
the Government could not resolve the circular debt problem on permanent basis
despite all the stakeholders being clear on the reasons behind the circular debt
In the light of above mentioned facts, provision for doubtful debts should be recognized in
the audited financial statements as per IAS 37: Provisions, contingent assets and liabilities
and IAS 36: Impairment of assets. Impact of non recognition of provision for doubtful debts
is summarized as under
Elements of financial
Material misstatement
Impact
statements
caused by error or fraud
Trade receivables
Overstatement
Net assets overstatement
Expenses
Understatement
Financial performance overstate
Profit after tax
Overstatement
Profits overstate

Page 99 of Annual Report

Point no 8: Contingency 143 million rupees on account of interest income from term deposits
but HUBCO management refused to pay said tax demand and also not recognized provision in
the audited financial statements
Second schedule of Income Tax Ordinance 2001 (Section 53) Part I and rule 74 explicitly articulate the
fact the interest income on terms deposits is not within the scope of exemption and its wording are
reproduced in the below.

FINANCIAL ANALYSIS OF HUB POWER COMPANY LIMITED-Year ended 30-06-2012

(74) Any profit on debt derived by Hub Power Company Limited on or after the first day of July,
1991, on its bank deposits or accounts with4[financial institutions] institutions] directly
connected with financial transactions relating to the project operations.
Conclusion: In the light of above mentioned legal requirements the provision for tax demand of 143
million should be recognized in the audited financial statements The impact of non-recording of
provision
1. Overstatement of profits
2. Understatement of expenses
3. Understatement of liabilities

Page 99 of Annual Report

Point no 9: Legal issue of non-deposit of sales tax in Government Treasury
We would make request to tax adviser and / or company management of HUBCO to clarify the
legal position of Company of under reviewed issued as per the relevant provisions of Sales Tax
Act 1990.

Page 98 of Annual Report

Point no 10: What is the status of liquidated damages under the Norwal Power Purchase
Agreement
We would make request to Company management to share the status of liquidated damages in
the subsequent time period of balance sheet date.

Page 97 of Annual Report

Point no 11: Fixed and floating charge over company assets
Please share percentage of company assets which have pledged / mortgaged or under fixed or
floating charge. Moreover, we would like to inspect the register of charges under section 136 of
Companies Ordinance 1984.

10

FINANCIAL ANALYSIS OF HUB POWER COMPANY LIMITED-Year ended 30-06-2012

Page 106 and 76 of Annual Report

Point no 12: Non-reconciliation of maturity schedule of financial liabilities with amount of
liabilities stated on the face of balance sheet
Total financial liabilities as per balance sheet
Long terms
loans

Trade and
other payables

Interest / mark
up accrued

25,834,390,000

127,711,782,000

1,638,555,000

Short term
borrowings

Current
maturity of
long term
loans

Total

19,688,469,000

2,165,723,000

177,038,919,000

Between 6 to Between 1 to 5
12 months
years
Rupees

Between 5 to
10 years

Total

16,264,330,000

48,203,934,000
126,301,387,000

Rupees
Contractual maturities schedule of financial liabilities
Less than 6
months

2011-12
Long term loans
Trade and other
payables
Short term
borrowings
Total

3,178,732,000
126,301,387,000

3,149,689,000

25,611,183,000

20,141,883,000
146,622,002,000

20,141,883,000
3,149,689,000

25,611,183,000

16,264,330,000

194,647,204,000

I would like to make request to clarify the difference between PKR 194,647,204,000 and PKR
177,038,919,000.

Page 106 of Annual Report

Point no 13: What is financial strategy of Company management to pay Rs 149,622,002,000

11

FINANCIAL ANALYSIS OF HUB POWER COMPANY LIMITED-Year ended 30-06-2012

I would like to make request to Company management to share the financial strategy to deal
the payment issue of financial obligations which will be paid within next 6 month and as per
contractual maturity schedule, its amount is 149.6 billion rupees.
SUMMARY:
In the AGM of HUBCO held today 27th September 2012 at 1100 hours at Marriot Hotel
Islamabad.
The above points were deliberated by me in detail however answers to some of my questions
were ambiguous and non explanatory.
I light of the above I have come to the following conclusions:
a. The Company is faced with extreme liquidity and solvency crisis and if the forth coming
events do not become favorable as regards circular debt and allied problems then there
will be a big question mark on the companys ability to move forward as a going
concern for which the provision of ISA-570 should have been pointed out by the
auditors.
b. Poor Financial stewardship of the companys resources as there is non co-relationship
among profitability liquidity and solvency position of HUBCO.
c. The closing paragraphs of statutory report of directors under section 236 of Companies
ordinance 1984 disclose the critical financial situation as given on page 63 of the annual
report.
d. Contingency of 143 Million Rupees on account of term deposits but HIBCO
management has refused to pay the said tax demand and also has not been recognized
as provision in the audited financial statements.
e. The Company is paying 7 billion as financial cost and the gearing ratio 48:52 is very high
and may stick out like a sour thumb in the future.

Recommendations
Shareholders of HUBCO are advised in their own interest to make a critical review and analysis
of my report and decide their future mode of action as past performance is no guarantee for
future performance.

12

FINANCIAL ANALYSIS OF HUB POWER COMPANY LIMITED-Year ended 30-06-2012

Dr. Babur Zahiruddin

Financial Analyst

13

FINANCIAL ANALYSIS OF HUB POWER COMPANY LIMITED-Year ended 30-06-2012