financial analysis report hubco

8/10/2019 Financial Analysis Report HUBCO

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

Hub Power Company LimitedFinancial Analysis Report

Period coverage: 1stJuly 2011 to 30thJune 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: 03324923235

Email:[email protected],
mailto:[email protected]:[email protected]:[email protected]:[email protected]


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TABLE OF CONTENTS

SR no Description Page no

1 Financial analysis approach ------------------------------------------------- 3

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


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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

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

Environmental analysis

Industry analysis

Operational review of HUBCO

Financial analysis


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1.

Financial plan-Year 2011 to 2015

2. Audited financial statements-Year 2012

3.

Internal audit reports

4. Management letter /. Letter of internal control from external auditors

5. 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 of1,955 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 Electricityindustry and its details are stated as under

4.1 Industry competitors

1 Altern Energy Limited

2 Ideal Energy Limited

3 Japan Power Generation Limited

4 Karachi Electric Supply Company Limited

5 Kohinoor Energy Limited

6 KOT ADDU Power Company Limited

7 Nishat Chunian Power Company Limited8 Nishat Power Limited

9 Pakgen Power Limited

10 S.G Power Limited

11 Sitara Energy Limited

12 Southern Electric Power Company Limited

13 Tri-Star Power Company Limited


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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.

To promote energy efficiency,

B.

To develop renewable energy,

C.

To introduce and maintain environmentally efficient technologies,

D.

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 oil-fired 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

2012 2011

Maximum theoretical capacity 10,541GWh 10,512 GWh

Total output 7,770 GWh 8,115 GWhLoad factor 74% 77%

5.5 NAROWAL PLANT capacity and Production

2012 2011

Maximum theoretical capacity 1,878 GWh 359 GWh


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Total output 1,321 GWh 237 GWh

Load factor 70% 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


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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.

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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 19,688,469,000F. 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 2007

Rupees

Trade

debts 151.1 billion 85.8 billion 66.7 billion 46.6 billion 24.8 billion 7.9 billion


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Sales 174.7 billion 123.3 billion 99.6 billion 82.7 billion 62.4 billion 44.1 billion

Finance

cost 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

statements

Material misstatement

caused by error or fraud

Impact

Trade receivables Overstatement Net assets overstatement

Expenses Understatement Financial performance overstate

Profit after tax Overstatement Profits overstate


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 inthe 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.


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(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


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.


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.


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 2,165,723,000 177,038,919,000

Contractual maturities schedule of financial liabilities

2011-12

Less than 6

months

Between 6 to

12 months

Between 1 to 5

years

Between 5 to

10 years

Total

Rupees

Long term loans 3,178,732,000 3,149,689,000 25,611,183,000 16,264,330,000 48,203,934,000

Trade and other

payables

126,301,387,000 126,301,387,000

Short term

borrowings

20,141,883,000 20,141,883,000

Total 146,622,002,000 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 PKR177,038,919,000.


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:

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 therewill 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.


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Dr. Babur Zahiruddin

Financial Analyst

financial analysis report hubco

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