Financial Analysis Report HUBCO

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 – 0332 – 4923235 4923235 Email: [email protected] [email protected],,

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

TABLE OF CONTENTS

SR no

Description

Page no

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

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

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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

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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 porter’s 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

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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 4.5Bargaining 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

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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 C ompany 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

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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 th

taken disinvestment decision during the year ended 30 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

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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. Trade receivable-WAPDA : PKR 133.000,000,000 B. Trade receivable-NTDC : PKR 18,000,000,000 C. Trade payables-PSO: PKR 123,000,000,000 D. Cash and Bank Balances: PKR 497,031,000 E. Short term borrowings: PKR 19,688,469,000 F. 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

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85.8 billion

66.7 billion


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 f ollowing 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 ex emption and its wording are reproduced in the below.

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(74) Any profit on debt derived by Hub Power Company Limited on or after the first day of J uly, 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-reco rding 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.

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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

Short term borrowings

Current maturity of long term loans

Total

Rupees 25,834,390,000

127,711,782,000

1,638,555,000

19,688,469,000

2,165,723,000

Between 6 to Between 1 to 5 12 months years Rupees

Between 5 to 10 years

177,038,919,000

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

16,264,330,000

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

Total

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

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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: th

In the AGM of HUBCO held today 27 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 company’s 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 company’s 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 hi gh 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.

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Dr. Babur Zahiruddin

Financial Analyst

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Financial Analysis Report HUBCO

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