A review of HUBCO's annual accounts
Delay in resolution of tariff adversely affects the cash flow of the Company
By SHABBIR H. KAZMI
Oct 04 - 10, 1999
Despite posting a net profit of Rs 6.7 billion, The Hub Power Company (HUBCO) skipped dividend announcement. Apparently it was due to its ongoing dispute with WAPDA and the Government of Pakistan (GoP). Profit was low as compared to the forecast but very much in line with the declining profile of the Company. According to shareholders, the most important point is dividend they did not receive any return on their investment during the last 18 months.
The other point to note is that lower payments, being made by WAPDA, have virtually resulted in a net cash outflow despite posting a net profit of over Rs 6 billion. The point of concern is that although the Company has reported a profit for the year ending June 30, 1999, it has not received all this income from WAPDA. In the event that the full amount, as claimed by HUBCO, is not received from WAPDA, the Company will virtually post a loss for the year 1999.
The year can be termed as difficult one. In September 1998, the generator of unit-4 failed due to damage to the winding insulation. The unit remained out of service for approximately 15 weeks. In February 1999, transformer of main generator of unit-2 suffered an internal fault resulting in being destroyed by fire. A replacement transformer was installed within 6 months. The cost relating to this damage was recovered under the Company's insurance policies. Despite these problems, the plant achieved a 38 per cent thermal efficiency rate and generated 5,351,000 MWhrs of electricity.
HUBCO successfully completed 1000 days without a lost time accident on December 27, 1998. For its excellent achievement and performance, it received the prestigious 'Gold Award for Operational Safety' by the Royal Society for the Prevention of Accident (RoSPA), based in the United Kingdom.
Turnover for the year was Rs 20,667 million as compared to that of Rs 25,682 million for the year 1997. Operating cost for the year amounted to Rs 6,705 million as against Rs 10,808 million for the previous year. The current year turnover was lower due to declining profile of the tariff charged under the Power Purchase Agreement (PPA) and lower electricity dispatched to WAPDA at 51 per cent as against 55 per cent for the year 1997.
Notwithstanding the net profit recorded in the Profit and Loss Statement, the Company has during the year suffered a net cash outflow. This was due to receipt of partial payment in respect of sale of electricity throughout the year as a result of litigation. The payment of amounts due from WAPDA is secured through firstly a standby letter of credit, and secondly, a guarantee from the GoP. In spite of this, all liabilities have been discharged by the Company as they have become due. During the year, the Company re-paid the two tranches of the senior debt amounting to Rs 3,020 million in July 1998 and January 1999.
For more than two years the Company has continued to be involved in litigation both inside Pakistan and abroad. Nevertheless, it continues to seek an amicable resolution of its disputes with WAPDA in an atmosphere of mutual respect and cooperation. Throughout the period, it has fulfilled its obligation under various contracts and continues to do so. Therefore, there is an urgent need to resolve tariff issue at the earliest as it has been affecting the inflow of foreign direct investment into Pakistan.
Looking at the precarious foreign exchange reserves of Pakistan, it is more or less clear that the country will not be able to honour the PPAs, signed with the independent power plants. Since the World Bank was instrumental in establishment of IPPs in Pakistan and also provided funds, it should restructure HUBCO debt to help reduce tariff.
However, the GoP should also peruse privatization of both WAPDA and KESC. While privatization of WAPDA may take a longer, KESC can be privatized more quickly. In the mean time area electricity boards, which are now working as independent corporations, should also be offered for sale.
There has been a delay in the disbursement of power sector restructuring loan from Asian Development Bank. It is therefore suggested that now this loan should be disbursed to KESC and area electricity boards after their privatization. To expedite the disbursement, the GoP should privatize the power sector at the earliest.
To make the state-owned utilities economically viable it is necessary that GoP should promulgate laws for the recovery of receivables. These utilities should also bring down T&D losses which mostly comprise of theft.
Establishment of independent power plants without privatizing transmission and distribution network was a blunder. Both WAPDA and KESC suffer mainly due to over 40 per cent T&D losses and mounting receivables not because of IPPs. Therefore, without removing the root cause of financial ailment any reduction in tariff cannot help WAPDA and KESC.