The Hub Power Company (Hubco) will be incorporating its thermal power generating unit at Narowal into a separate, wholly-owned subsidiary, in a move analysts welcomed as providing more transparency into the company’s business operations.
The announcement was made on Wednesday, along with Hubco’s quarterly earnings release. The company did not formally state its reasons for doing so, but analysts speculate that the company may want to address concerns about the financial health of the 225-megawatt, oil-fired plant.
“This move will help the base plant to report its earnings separately, hence dispelling the investor fear of dividend cuts due to increasing short term borrowing for Narowal,” said Arif Shaikh, a research analyst at Global Securities, a brokerage firm, in a note issued to clients on Thursday.
There had been some concern among investors that Hubco’s dividend policy – currently the firm pays out a dividend twice a year like clockwork – would be changed after the Dawood Hercules Corporation bought a substantial stake and Hussain Dawood took over as chairman of Hubco’s board. The new management has since allayed many of those concerns, and the recent move appears to be part of that endeavour.
The incorporation of the Narowal plant is not expected to radically change anything about Hubco or its operations. “Narowal’s earnings will be reported on Hubco’s consolidated financial statements,” said Shaikh, in his note. “If the parent company finances Narowal’s receivables, it is likely that the company will realise a mark-up. On a consolidated basis, there will be no impact.”
The new Narowal company will not be Hubco’s only subsidiary, though it will be the only one to be wholly owned. The company already has another subsidiary called Laraib Energy, owned 75% by Hubco, which is setting up an 84-megawatt run-of-the-river hydroelectric power plant in Azad Jammu and Kashmir, about five miles downstream from the Mangla Dam.
The creation of holding companies appears to be a signature part of Hussain Dawood’s ethos of corporate governance. The pattern started with the Engro Corporation, which created a holding company in late 2009 and then separately incorporated each of its business lines, a move that was made on the advice of the global management consulting giant, McKinsey & Company. Since then, the Dawood Group has organised itself in a similar pattern, with the Dawood Hercules Corporation serving as its holding company.
Hubco was the first independent power plant to be set up in Pakistan, and was soon thereafter marketed by the World Bank as a model for global private sector investment in power projects based in developing countries. It is still the largest private power producer in the country. Its plant in Hub, Balochistan has a capacity to produce 1,292 megawatts of electricity.
After approval by the board, the proposal will now be presented to an extraordinary general meeting of shareholders. Hubco has among the least concentrated patterns of shareholding among all companies listed on the Karachi Stock Exchange, so shareholder approval is not a foregone conclusion.
Published in The Express Tribune, March 1st, 2013.
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