The Hub Power Company has informed the PSX that, in the greater national interest and upon the request of the Task Force constituted under the Prime Minister’s Office, the company has initiated a Negotiated Settlement Agreement. This agreement relates to the accelerated expiry on October 1, 2024, of its relevant contracts scheduled to expire in March 2027, concerning the Company’s 1292 MW power generation project located at Mouza Kund, Post office Gaddani, District Lasbella, Baluchistan. This project achieved COD (Commercial Operation Date) in 1996.
As per the terms of the Agreement, the Government of Pakistan (GOP) and the Central Power Purchasing Agency Guarantee Limited (CPPAG) have agreed to settle the Company’s outstanding receivables until October 1, 2024. The Board has approved the settlement terms and authorized the execution of a definitive agreement. The Company will inform the PSX regarding any material developments related to this agreement. the terms of the Agreement, GOP and CPPAG have agreed to settle the Company’s outstanding receivables until October 1, 2024. The Board has agreed to the settlement terms and authorised the execution of a definitive agreement. The Company shall accordingly keep the PSX informed regarding material developments in this regard, if any.
Meanwhile, according to Topline Research, the Hub Power (HUBC) Base power plant, which is being terminated now, contributed Rs19/share or 32% to the total EPS of the company in FY24. With this termination, we believe earnings for the remaining part of the PPA, i.e. FY25, FY26 and 9MFY27, will remain absent for the base plant. Assuming 100% recovery of these cashflows (in the best case), the present value of these cashflows would be Rs35-37/share. HUBC’s share price, due to these fears, has fallen by Rs34/share from Rs146 on Sep 19, 2024, to Rs112 on Oct 08, 2024. While from a recent peak of Rs166.69 on Jul 03, 2024, HUBC’s share price has fallen by 29% or Rs46/share (adjusted for Rs8.5 dividend).
With this termination, companies are expected to receive the previous backlog of their principal amount receivables within 90-120 days, as per our channel checks. HUBC has receivables of Rs53bn from the base plant based on the numbers quoted by the management in the analyst briefing (while in unconsolidated accounts, the receivables balance is Rs63bn). Assuming Interest receivables of Rs20-25bn, taking a hint from the unconsolidated breakup, HUBC will receive Rs30-35bn via this settlement (Rs23-27/share). While HUBC has an unconsolidated debt of Rs41bn, we believe any settlement amount received may be paid for the retirement of the indebtedness as and when received.
§ Furthermore, there are also news reports suggesting the conversion of take or pay agreements for Narowal (100% owned subsidiary of HUBC) and Laraib (75% owned), contributing 7% and 12% to HUBC’s earnings, respectively. In the case of Naroawal, this may happen, while in the case of Laraib, there will be limited impact on Laraib as it’s a hydel project and produces electricity at zero fuel cost. Assuming Narowal’s requirement to grid for two months based on its load factor, we believe the profit contribution of Narowal may decline from the current Rs3.8/share to Rs0.6/share.
§ On the dividend side, HUBC declared a dividend of Rs20/share in FY24, which was primarily funded through Narowal, Laraib and base plant operations despite the declaration of US$150mn dividend by China Hub Power in FY24 in which HUBC’s share was US$69mn (Rs19bn or Rs15/share for HUBC shareholders before tax). Meanwhile, HUBC received a dividend of Rs3.5bn from Hub Power Holdings, which owns China Hub Power. This may be the case as a more than half of US$150mn dividend (US$80mn), was disbursed to Hub Power Holding in May 2024. This is also visible from an increase in Cash balance in consolidated accounts from Rs8.5bn in Mar 2024 to Rs29bn in Jun 2024. We believe this will be routed to HUBC in 1QFY25/2QFY25 and may be used to finance a dividend of Rs8.5/share announced in 4QFY24 or retirement of remaining debt on the unconsolidated balance sheet and announcement of a first interim dividend of FY25.
§ The other two associates/subsidiaries of HUBC, Thar Energy and Thal Nova, may also start their payouts in FY26/FY27. Thar Energy started operations in October 2022, and Thal Nova in February 2023. Taking a cue from Lucky Electric, which announced payout in June 2024 results with COD in March 2022, the dividend payment from Thar Energy and Thal Nova can not be ruled out. We expect dividends of Rs2-3/share each starting in FY26.
§ That said, we believe this settlement may result in HUBC’s earnings falling from the existing Rs54/share to Rs35-40/share, with dividend falling from Rs20/share in FY24 to Rs10-12/share and ramping up subsequently to Rs18-20/share from FY26 and onwards with the help of Thar Energy and Thal Nova. However, with the retirement of Rs30-40bn of debt, HUBC’s earnings may increase by Rs5-6/share in addition to the above with a similar quantum in payouts as and when debt retires.
§ In case of funding requirement of BYD plant for HUBC, we believe, the estimated cost would be Rs15-25bn with debt: equity component of 60:40. Since this is likely to be a JV with BYD, the capex requirement for HUBC will be Rs3-5bn, likely to be spanned over 1-2 years.
§ The key risk to analysis is (1) any negotiation of new projects which impact payouts of China Hub Power, Thar Energy and Thal Nova, and (2) non-receipt, delayed receipt or lower than expected receivables amount of base plant. While the upside case to payout includes non/lower retirement of debt with the settlement amount.
