Provisioning for bad debts wipes out HUBCO profits

Aug 21 - 27, 2000

The dispute with WAPDA and its failure to honour contractual obligations, restrictions imposed by the courts altogether have caused huge financial losses to HUB Power Company placing in a position where it is unable to recommend any dividend for the last two years.

Syed Khursheed Hussain at a recently held Press Briefing in Karachi stated this. It may be recalled that HUBCO had declared 70 per cent dividend on its shares for the year ended June 30, 1997. However after eruption of a dispute between WAPDA and HUBCO on Power Purchase Agreement (PPA), the HUBCO shares continued to show a declining trend in the stock market.

Giving the break downs of the financial operations, Khursheed said that the turnover for the year ended June 30, 2000 was estimated at Rs25,601 million as against Rs20,667 million in the year 1999. Operating costs were Rs14,888 million (Rs10,307 in 1999), resulting in a gross profit of Rs10,715 million against Rs10,360 million of 1999). These amounts are higher than previous year figures due to the cumulative effect of the continuous rise in the price of Residual Fuel Oil (RFO), higher electricity dispatch by WAPDA at 61 per cent as against 51 per cent during 1999. The declining profile of the tariff charged under the PPA due to retirement of debt.

The RFO price, a contracted pass through item to WAPDA, led to an increase of 60 per cent in the cost due to rise in fuel prices. At the beginning of the year, the fuel price was fixed at Rs6,070.50 per tonne, which turned to Rs9, 680 per tonne at the end of the year representing an increase of 60 per cent in the current financial year.

During the year, the company's gross trade debts also increased by Rs7,490 million and stood at Rs17,377 million at June 30, 2000. This increase in trade debts is due to the tariff dispute raised by WAPDA.

Due to the length of the dispute now entering its third year, the company has decided to provide against all amounts disputed or not recovered under the terms of the PPA in accordance with international accounting standards a provision of Rs13,445 million included in this year's accounts resulting a loss of Rs6,985 million for the year. He said that provision made by HUBCO for bad debts have wiped out the entire profits of the company for the last two years.

While referring efficiency and performance of WAPDA and IPPs, he said that HUBCO was operated at a very higher standard of efficiency and availability comparing more than favourably with all other plants operating in Pakistan. Electricity generated during the year amounted to 6,404 GWhrs, which place the unit comparable to any other unit operating elsewhere in the country.

Replying to a question, Khursheed said that as a result of the dispute the flow of foreign investment especially in the energy sector has slowed down to a certain extent. Referring to the positive remarks of the Finance Minister regarding early solution of the dispute, he expressed the hope that the present government has a will to resolve the issue. The litigation process like elsewhere in the world is however slow and would take its time to be concluded. He said that the company has full confidence in the domestic courts, yet the issue could have been resolved much earlier provided international arbitration was allowed. He said that the company filed an appeal with the Supreme Court of Pakistan to review its judgement restricting company to go for international arbitration.

He said that although HUBCO is paying the GST levied by the government according to legal requirements, however WAPDA on its part has so far not adjusting these dues paid by HUBCO.

Khursheed said that the high tariff rates as are generally alleged by WAPDA are due to higher fuel cost, which is beyond the control of HUBCO. He said that approximately international fuel price registered a rise around 60 per cent during the year, which was ultimately added to power generating cost. Under utilization of project capacity is yet another factor for increase in the tariff. "Lesser the capacity utilization higher the tariff, higher the capacity utilization lesser the tariff" is the formula for lowering the tariff rates but due to unknown reasons WAPDA is not utilizing plant capacity. The company's dispatch to WAPDA was 61 per cent in the year ended June 30 from 51 per cent a year back. If they buy electricity at around 84 per cent of the plant capacity, the tariff may have cut further. He said that the fresh proposal offered by HUBCO to WAPDA is still unanswered.

Giving a break up of the tariff rates, he said HUBCO charges around Rs3.87 per kW of which Rs1.07 has been consumed in the fuel oil, 58 paisa due to exchange rate and 15 paisa because of inflation.

Clarifying HUBCO's position, he said that company has voluntarily responded to 50 questions put up by the FIA. Now the ball is in government court. If HUBCO was guilty of corruption it should be penalized under the law and if the charges of corruption were not proved the company should be treated as innocent accordingly.