Hub Power Company Limited’s (PSX: HUBC) financial performance for the 1HFY18 was announced yesterday on the stock exchange, highlighting a 3.6 percent year-on-year increase in consolidated earnings for the period. In the previous quarter (1QFY18), the IPP witnessed an earning decline of over three percent, which came from the planned overhaul of three engines at Narowal plant, which continued from FY17 O&M activity (overhaul of 8 engines)
While 1HFY18 earnings were only up by 3.6 percent due to higher operating costs in 1QFY18, the 2QFY18 PAT was up by 10.8 percent, year-on-year. The absence of any maintenance activity in 2QFY18 resulted in lower operating costs, and hence an increase in the earnings for the quarter. The growth in bottom-line also came from higher turnover on account of higher fuel prices, while the increase in finance cost from rising circular debt payments once again kept a check on the earnings.
The independent power producers (IPP) have been in a fix due to government’s ban on furnace oil based power generation. Since the ban in November 2017, expectations from the power plants running on furnace oil were that they would operate at lower load factor. However, due to the rising FO glut by the refineries, the government had to resort back to furnace oil based power generation partially, which could also be seen in HUBC’s higher load factor in December 2017 that lifted revenues and cost.
However, the challenge isn’t over yet. As AKD Securities highlights in its research report, the implications of this move are mixed for Hub Power Company Limited. This is because its base plant, Hub is relatively inefficient - placed at number 8 of the merit order list of the furnace oil based plant and thus would see its load factor drop as new coal and hydel plants keep coming online in the coming years. While on the other hand, it Narowal plant is relatively efficient, and is likely to continue operations at 60-70 percent load factor as the government is likely to continue with limited FO-based power generation at least for the next two years to keep the local refineries’ furnace oil stocks in check.
The market also points out that even amid these challenging times, HUBC might remain better off relatively. First, even after a drastic decrease in the base plant’s load factor, HUBC will be able to make capacity payments in the short run. And second, its long term position is secured with its diversified investment portfolio. Investments in coal based generation (China Power Hub Generation Company (CPHGC) and Sindh Engro Coal Mining Company (SECMC)) will help bottom-line in negative times from the closure of furnace oil based power plants.
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