"Parked receivables of HUBCO"
A growing concern, more important than ongoing negotiations with WAPDA
By SHABBIR H. KAZMI
Aug 30 - Sep 05, 1999
The ongoing negotiations between HUBCO and WAPDA mainly focus two aspects, tariff and disputed receivables. However, it seems that while the main focal point is tariff reduction, hardly any attention is being paid to the consequences of any reduction in tariff and fate of controversial receivables. Any decision regarding tariff reduction with taking into account receivables is expected to severely hurt the cash flow of HUBCO. The Company has been utilizing most of its cash receipts for fuel purchase, payment to O&M contractor and debt servicing. It is also being said that the Company has utilized most of the amount for dividend for 1998-98.
From shareholders' point of view, settlement of outstanding receivables is more important than the tariff adjustment. For shareholders, adjustment in tariff spread over 30-year life of the project, has less impact on the return on their investment. But stuck-up receivables have higher weight in the value of the stock due to time value of money. HUBCO was not allowed to pay dividend to the shareholders for 1997-98 and no return has been paid for the year ending June 30, 1999.
According to some securities analysts, approximately Rs 10 billion or US$ 193 million is due to HUBCO from WAPDA. Capacity purchase price (CPP) payments, since June 1998, have been a major cause for these receivables. HUBCO is getting an average of Rs 730 million as against the actual billing of Rs 1,150 million per month. If this disputed amount has to be written-off (as one gets the feeling) then shareholders will be deprived of a large percentage of dividend receivable for the last two years. Moreover, HUBCO will have to make adjustments in its income statement to offset these parked receivables.
Considering the poor financial health of WAPDA, financial analysts do not expect that the utility will be able to pay off Rs 10 billion in lump sum. Many analysts say that this amount seems to be unrecoverable by HUBCO, even if WAPDA is allowed to make payment in installments. The precarious cash flow position will not allow the utility to fulfill any obligation with retrospective effect. Therefore, whatever the decision may be, it will have serious implications for shareholders of HUBCO. The creditors will not be affected in any case.
On top of this, the situation is expected to get worse with the anticipated increase in furnace oil price. Furnace oil price is expected to go up by around 7.5 per cent to Rs 6,526 per tonne in the coming weeks. Since fuel cost is a 'passed-on' component of bulk-power purchase price for WAPDA, this increase is bound to further worsen the financial health of WAPDA unless the tariff is increased once again to compensate for the increase in fuel cost. This seems a remote possibility because lately KESC has been forced to reduce tariff, to make it uniform with WAPDA. Besides, the GoP has a lot of pressure from consumers for not allowing any increase in tariff.
A disbursement of US$ 500 million to Pakistan towards power sector restructuring has not been made due to inability of WAPDA/GoP to settle the present controversy with the IPPs. Keeping this in mind, some of the sector analysts believe that there could be a way out. In their opinion, multilateral lenders may disburse this amount subject to GoP reaches a mutually acceptable tariff applicable from retrospective effect. The GoP will be allowed to use a part of the proceed for making payment to HUBCO and the balance on revamping of transmission and distribution network primarily to control T&D losses. Bulk of these losses are due to highly depleted T&D network of both WAPDA and KESC. Around 40 per cent T&D losses are the main reason of poor cash flow for the public sector utilities.
There could be another alternative that the lenders reduce the rate of mark-up on loans to HUBCO. However, the current sovereign rating of Pakistan may not allow the lenders to exercise this option. Therefore, another way out could be that the majority stake holders of HUBCO agree on a lower return of equity (ROE). Analysts believe, that perhaps the stake holders will be obliged to agree on 15 per cent ROE to end the confrontation going on for more than a year.
The ongoing controversy regarding bulk power purchase tariff for IPPs has now become a critical factor in fresh disbursement of loans from multilateral lenders. It has also affected inflow of foreign investment into Pakistan. If the GoP is really serious in putting the economy on faster track of development to meet its enhanced debt servicing liability and accelerate the process of privatisation, this controversy must end at the earliest. Pakistan needs speedy privatization of both WAPDA and KESC for fresh investment in transmission and distribution network to ensure uninterrupted electric supply to industries.
HUBCO Receivables from WAPDA
year Rs in billion
July and Aug'99 0.9