Hub Power Company Limited

Hub Power Company Limited (PSX: HUBC) is an independent power producer (IPP) that has over 1600MW combined installed capacity from its 3 plants. It owns an RFO-fired power station of 1,200 MW in Balochistan, at Hub, which is its base plant. It also owns a 214 MW combined cycle RFO-fired power station in Narowal, Punjab, and also holds 75 percent controlling interest in Laraib Energy Limited, which owns and operates a run-off-the-river hydel power plant near Mangla Dam in AJK.

HUBC in the last 5 years has ventured into the coal business and established wholly owned subsidiaries to launch new initiatives amid shifting fuel preference for power generation from FO to coal and LNG. It owns 46 percent shares of newly commissioned 1320MW imported coal-based China Power Hub Generation Company (Private) Limited (CPHGC) at Hub. The company is the only power producer in Pakistan with four projects listed in the China Pakistan Economic Corridor (CPEC) including CPHGC, Sindh Engro Coal Mining Company (SECMC) and the upcoming Thar Energy Limited (TEL) and ThalNova Power Thar (Pvt.) Ltd. (TNPTL) at Thar Block II. The power generation capacity oh HUBC will enhance to over 3500MW after completion of these power projects.

Shareholding Pattern

Key shareholding has changed several times for HUBC. Dawood Hercules was a major shareholder of HUBC since 2012 when the IPP’s initial sponsors Xenel International and National Power International exited from their shareholdings and Dawood Hercules Corporation and its affiliates bought most of this given up shareholding. Then in 2018, Mega Conglomerate acquired a substantial shareholding in Hub Power Company from Dawood Hercules and Cyan Limited to become the largest shareholder of the company. According to company’s website, Mega Conglomerate is a diversified conglomerate with business holdings including the country’s largest container terminal, third largest dairy producer, top tier cement manufacturing company, vertically integrated shipping company and a progressive real-estate developer. Mega Conglomerate owned approximately 17 percent shareholding in HUBC according to FY20 annual accounts.

Past 5-year Performance

FY15 was a year of transformation and growth for Hubco. The company generated one of the highest returns for the shareholders, revamped and turned around the base business. The slight decrease in load factors came from a decrease in generation, caused by maintenance work on the boilers. The company’s consolidated earnings increased by around 48 percent year-on-year in FY15

In FY16, the company’s consolidated earnings increased by around 7.5 percent year-on-year, which was affected by the decline in turnover in FY16. Revenues toppled by 34 percent year-on-year due to lower furnace oil prices, lower generation bonus and lower Net Electrical Output (NEO) due to low load demanded by NTDC

The IPP’s consolidated earnings in FY17 came down significantly. The decrease in consolidated earnings as reported in the company’s annual accounts, was mainly due to higher repair and maintenance expenditure on the Hub Plant and 36,000 running hours’ major maintenance of six engines at Narowal Plant, lower exchange rate and higher losses of TEL and CPHGC projects that had been initiated. Apart from that, higher general and administrative expenses and lower other income also affected the bottomline in FY17 that fell by 9.2 percent year-on-year.

HUBC’s posted slight improvement in earnings for FY18 despite a slight dip in revenues. The consolidated earnings grew by three percent year-on-year in FY18. The modest growth in earnings was driven by lower repair and maintenance expenditure at Hub and Narowal Plants. However, these were partially offset by lower profits of Laraib, higher financing costs and administrative expenses. In FY18, HUBC’s base plant at Hub witnessed a drop in load factors from 65 percent to 49.5 percent due to lower electricity demand from the power purchaser. The Narowal plant also witnessed a decrease in load factors from 71 percent to 64 percent in FY18, which was due to the overhaul of three engines and seven alternators at Narowal plant.

During FY19, the country’s power generation from furnace oil declined by 60 percent year-on-year, where its share in total power generation was only 7 percent in FY19 versus19 percent in FY18. As a result, HUBC’s load factors for its base plant plunged from 49 percent to just at 7.87 percent due to no generation on FO. Revenues were seen shrinking by 42 percent year-on-year due to lower electricity dispatches. Lower generation resulted in lower operating costs. However, the company’s bottomline posted a flattish growth of only 2 percent year-on-year, and apart from slow growth in revenues, the restriction in earnings came from higher finance cost due to higher interest rates and higher capital expenditure largely coming from coal investments. The IPP also did not announce any dividend during the year. Moreover, the cash it received from the first Energy Suck was used to pay off PSO’s payables.

FY20 and Beyond

FY20 has been a turbulent year for the power sector not only because of the COVID-19 pandemic overtaking the second half of the year, but also the investigation in the IPPs’ returns that landed IPPs in hot waters. In terms of financial performance, FY20 for HUBC has primarily been about milking its coal investments. At a time when thermal power generation has been dwindling in the country due to depleting natural gas and controls on furnace oil consumption, HUBC’s associated company - China Power Hub Generation Company commenced generation in August 2019.

HUBC posted consolidated earnings growth of over 2.2 times for FY20 despite a17 percent year-on-year decline in the turnover. This was because around 50 percent of the growth in the bottomline was brought by the earnings from the 1320MW coal fired power plant, while the company’s base plant at Hub continued to face falling load factors. The FO based plants received lesser load factors due to low demand from the Power Purchaser due to lockdown in the country as well as availability of relative electricity on coal and hydel. Another factor that fueled earnings growth was currency depreciation that stood at around 24 percent in FY20.

The growth in earnings in FY20 for HUBC was held back by 61 percent higher finance cost; higher effective tax rate for FY20 versus FY19, which was due to the recognition of deferred tax on share of profit from CPHGC; and one-off loss due to transfer of 3 percent equity shareholding in CPHGC by Hub Power Holding Company and China Power International (Pakistan) Investment Limited (CPIPI) to Government of Balochistan. However, the delay in payments and looming circular debt constrained the company’s cash flows, which resulted in no dividend announcement.

And amid the uncertainties over termination of contracts of the IPPs as a result of the recent agreement between IPPs and the government, HUBC coal investments hold the key for the company; the company might be converting the furnace oil plants to coal or RLNG ones. And besides the imported coal plant commissioning in FY20, the indigenous coal project Thar Energy Limited (TEL) also achieved the financial close. The second plant in Thar, 330MW ThalNova Power Thar (Pvt.) Ltd (TNTPL) Project also signed financing agreement in July 2019; construction work on both projects is going on albeit at a slower pace due to covid-19 outbreak.