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THE HUB POWER COMPANY LIMITED

(ANNUAL REPORT 1997)

CONTENTS

COMPANY INFORMATION

Head Office:

3rd Floor, Islamic Chamber Building

ST-2/A, Block-9, Clifton, P.O. Box 13841

Karachi-75600

Registered Office:

C/o Ford, Rhodes, Robson, Morrow,

Premises No. 1 to 5, Elahi Chambers,

C/o Ambassador Hotel Building,

I&T Centre, Khayaban-e-Suharwardi,

Aabpara, P.O. Box 2388, Islamabad.

Company Secretary:

S. Khurshid Husain

Principal Bankers:

Account Banks:

· National Development Finance Corporation, Karachi & Islamabad

· Citibank N.A., Karachi

· Bank of Tokyo - Mitsubishi (UK) Limited, London

· The Sakura Bank Limited, London

· Banco di Napoli International S.A., Luxembourg

Inter-Creditor Agent:

Citibank International, plc, London

Legal Advisors:

Linklaters & Paines

Rizvi, Isa & Co.

Kabraji & Talibuddin

Auditors:

Ford, Rhodes, Robson, Morrow

Registrar:

Ford, Rhodes, Robson, Morrow

NOTICE OF THE SIXTH ANNUAL GENERAL MEETING

Notice is hereby given that the Sixth Annual General Meeting of the Company will be held on Wednesday,

September 17, 1997 at 2.00 p.m. at 250-A, Street No. 23, Sector E-7, Islamabad to transact the following

business:

1. To confirm the minutes of the Fifth Annual General Meeting of the Company held on November 20,

1996.

2. To receive and adopt the Audited Accounts of the Company for the year ended June 30, 1997 and the

Directors' & Auditors' Reports thereon.

3. To appoint Auditors and to fix their remuneration.

4. To elect Directors in accordance with the provisions of Section 178 of the Companies Ordinance 1984

for a term of three years commencing from the date of holding of the Annual General Meeting.

As fixed by the Board of Directors at their meeting held on May 21, 1997 the number of Directors to be

elected will be twelve (12).

The following Directors of the Company will cease to hold office upon the election of new Directors.

1. Mr. M. A. Alireza H.I.

2. Mr. Y. Asahata

3. Mr. P. F. Bennett

4. Mr. C. J. Brown III

5. Mr. Brian Chang

6. Mr. C. R. W. Masterson

7. Dr. I. M. H. Preston C. B.E.

8. Mr. S. N. A. Shah

9. Mr. P. H. Smith

10. Mr. M. A. Tumbi

11. Mr. S. J. K. Wheeler

12. Mr. P. J. Windsor

By Order of the Board

S. Khurshid Husain

Karachi - August 06, 1997

Company Secretary

NOTES:

1. The Share Transfer Books of the Company will remain closed from September 05, 1997 to September

19, 1997 (both days included).

2. A member entitled to attend and vote at the meeting may appoint a proxy in writing to attend the meeting

and vote on the member's behalf. A Proxy need not be a member of the Company.

3. Duly completed forms of proxy must be deposited with the Company Secretary at the Head Office of the

Company not later than 48 hours before the time appointed for the meeting.

4. Every candidate for election as a Director, whether a retiring Director or otherwise, shall file with the

Company at least fourteen (14) days before the date of the AGM a notice of their intention to offer

themselves for election as a Director alongwith their consent in the prescribed form to their appointment

as a Director of the Company.

5. Shareholders are requested to notify any change in their address immediately.

BOARD OF DIRECTORS

Mr. M. A. Alireza H. I.

Chairman

Other directorships

Xenel Industries Limited

& other Xenel Group Companies

Xenel international Ltd.

Mr. P. H. Smith

Vice Chairman

Other directorships

Electra Insurance Ltd

National Power International Holdings BV

Kot Addu Power Co. Ltd

Tejo Energia

Mr. D. M. Woodroffe

Chief Executive

Mr. Y. Asahata

Other directorships

Hub Power Japan Corp

Mr. P. F. Bennett

Other directorships

Kot Addu Power Co. Ltd

Mr. C. J. Brown

Other appointments

Managing Director, Europe

Entergy Power Group

Mr. B. Chang

Other directorships

Task Technology Ltd

Taisun Group of Companies

Asia Petroleum Ltd

Fauji Oil Terminal Co. Ltd

Pakistan Power Ltd

Mr. C. R. W. Masterson

Other directorships

National Power Share Schemes Ltd

Electricity Pensions Trustee Ltd

De Haviland Aircraft Museum Ltd

Dr. I. M. H. Preston C. B.E.

Other directorships

Mining (Scotland) Ltd,

Scottish Coal Company Ltd

East of Scotland Water Authority

Motherwell Bridge Holdings Ltd

Clydeport plc

Deutsche Morgan Grenfell (Scotland) Ltd

Scottish Council for Development and Industry

Kot Addu Power Co. Ltd

Mr. S. N. A. Shah

Other directorships

Jahangir Siddiqui & Co. Ltd

Philips Electrical Industries (Pak) Ltd

Forbes, Forbes, Campbell & Co. Ltd

Mr. M. A. Tumbi

Other appointments

General Manager Finance, Xenel

Mr. S. J. K. Wheeler

Other directorships

American National Power, Inc

Dagenham & Barking Management Ltd

Hinduja National Power Corporation

Mr. P. J. Windsor

Other directorships

American National Power, Inc

National Power International Holdings BV

National Power International Ltd

National Power of America, Inc

National Power Polska Spolka z.o.o.

National Power (Kot Addu) Ltd

Tejo Energia

Mr. Zafar Iqbal

Nominee of

National Development

Finance Corporation

Mr. S. Abbas Husain

Nominee of

Government of Balochistan

Mr. S. Potter

Nominee of

Commonwealth Development

Corporation

CHAIRMAN'S REVIEW

In the name of God the Most Merciful and Most Benevolent.

It gives me great pleasure to introduce the Company's Report and Accounts for the financial year ended

June 30, 1997.

During the year the Company successfully commissioned all four of its 323MW generating units in

aggregate 27 unit weeks early. On March 31, 1997 the Company achieved Full Commercial Operation

within the project budget of US$ 1.6 billion. Each of these achievements is remarkable but taken

together are almost unique for a power project anywhere in the world. This has to be a matter of pride

for the Country demonstrating as it does that it is possible to both finance and construct large scale

infrastructure projects successfully in Pakistan.

The Company started commercial supply to The Water and Power Development Authority (WAPDA) on

July 9, 1996. By the end of June 1997 the Company had delivered 5,821GWhrs of electricity for distri-

bution to industry, commerce, agriculture and domestic customers. During the recent period of power

shortage the Power Station operated at 100% utilisation for extended periods and generated up to 20%

of all electricity supplied in the Country. Thus the operations of the Company has had a significant

impact on reducing the levels of load-shedding.

As required under the Power Purchase Agreement, WAPDA opened the largest ever local syndicated

standby Letter of Credit in favour of the Company to provide security in respect of its payment obliga-

tions. During the year the Company billed and received payments from WAPDA for available capacity

and energy produced.

The technical performance of the Power Station in respect of both availability and thermal efficiency has

been better than the guaranteed levels. Utilisation of the available capacity by WAPDA at 73.86% is

higher than the base case utilisation of 64.6% assumed in the Equity Offer for Sale. As designed, the

Power Station was required to have a net output of 1200MW. However, commissioning tests have

demonstrated that the actual net output was 57MW higher at 1257MW.

It is the policy of the Company to both operate and maintain the Plant to the best international standards.

In this context, I am pleased to be able to report that the operation of the Power Station achieved ISO

14001 certification in respect of Environmental Controls, a first for any Company in the Country.

Since the end of the financial year the Company has continued to maintain its current high levels of

availability and has continued to deliver electricity in line wit. h the levels indicated in the Equity Offer

document. I am therefore able to confirm that the Company expects to declare an interim dividend

during the first quarter of 1998. The Company will also begin to repay its senior loans in the first month

of 1998. These are all significant milestones for the future which, God willing, I am confident the

Company will achieve.

It gives me particular pleasure to report that the Company has continued to support the Balochistan

Rural Support Programme and the payment of Octroi taxes is making a significant contribution to the

development of Balochistan.

I would like to thank the Company's Contractors for completing the Power Station to time and cost, and

our employees for their hard work and dedication.

Mohamed A. Alireza

Chairman

REPORT OF THE DIRECTORS

The Directors have pleasure in presenting the Annual Report and the Accounts for the year ended June

30, 1997.

Principal Activities

The principal activities of the Company are to design, construct, finance, own, operate and maintain an

oil fired power station in Pakistan with a net capacity of 1200MW. The Company commenced full com-

mercial operation on March 31,1997 when the Commercial Operations Date (COD) of the Complex was

declared. Fiscal year 1996-97 was a year of developing management controls and monitoring the

completion of all four units. The business has progressed broadly in line with the forecast made at the

time of financial close and with the full support of the lenders and the principal shareholders.

Finance

During the year the Company commenced its operational phase when the first unit was commissioned in

July 1996. Operating profit is higher than the Equity Offer projections which has been achieved through

the early completion of the units. Total turnover for the year was Rs. 18,308 million and Operating costs

were Rs. 8,925 million, these amounts are higher than the prospectus figures due mainly to a 15.3%

devaluation of the Pakistani Rupee during the year and a 268% increase in the cost of fuel from Rs

2,350 per ton to Rs 6,297 per ton since 1994. The Earning Per Share (EPS) for the year amounted to

Rs. 6.34.

During the year the Company drew Rs 4,815 (1996: Rs 15,861 ) million from its secured debt facilities to

finance the project construction. Total drawing to June 1997 amounted to Rs 38,461 (1996: Rs 33,646)

million. The construction, activity ended as planned with all payments to the Turn Key Construction

Contractors having been made. The Company voluntarily terminated all un-utilised base and standby

loan facilities, after funding the last draw down, on July 10, 1997.

As required under the Fuel Supply Agreement, the Company opened a Letter of Credit in favour of

Pakistan State Oil (PSO) to provide security in respect of fuel supplies. The pipeline to deliver fuel was

completed by PSO in October 1996 and the Company is taking delivery of Residual Fuel Oil through the

pipeline without any technical or financial difficulties.

Construction

The Construction and Commissioning phase was completed when the fourth and final Unit was commis-

sioned in March 1997. The first unit was commissioned in July 1996, having been delayed by 17 days

due to a boiler oil fire. The second Unit was commissioned 23 days ahead of schedule in September

1996 and the third Unit was commissioned in November 1996 substantially ahead of schedule by 50

days. The early completion of the units provided much needed electricity for the Country and helped

reduce nation-wide load shedding. Since March 31, 1997 all four units have been running at near full

capacity. The availability and thermal efficiency of the units are better than the required and expected

levels.

Operation

Hubco's Operation and Maintenance (O&M) Contractor assumed full responsibility after the declaration

of Commercial Operation on April 1, 1997. During the commissioning period the O&M Contractor

progressively took over the responsibility for the Plant from the Construction Contractors on a Unit by

Unit basis. At present the plant is staffed by over 300 personnel and the O&M Contractor is providing

ongoing training to local engineers to operate and maintain the Complex.

Social Action and Environment

During the year the Company continued its support to the Balochistan Rural Support Programme to

introduce self help programmes into the area for the uplift of the community surrounding the Complex.

This programme is aimed at developing self help organisations using appropriate technologies. Some

twelve local village groups have already been established.

Environmentally, the Complex is operating within the strict guidelines and limits established by the

World Bank for emission and waste. In June 1997 our O&M Contractor achieved ISO 14001 recognition,

a first for any power station in the Country.

Appropriations

In accordance with the Company's commitments to the financial institutions no dividend will be recom-

mended this year. As previously planned and according to the Prospectus, the Company expects to

announce an interim dividend in February 1998.

Board of Directors

The current members of the Board are listed on Page 3. Members of the Board were appointed or

resigned during the year as follows:

Mr. K. Iqbal

(resigned 19/2/1997)

Ch. Sajjad All

(appointed 21/2/1997)

Nominee, NDFC

Capt. F. Ahmedzai

(resigned 19/2/1997)

Mr. K. M. Tariq

(appointed 21/2/1997)

Nominee, Government of Balochistan

Ch. Sajjad All

(resigned 21/5/1997)

Mr. Zafar Iqbal

(appointed 21/5/1997)

Nominee, NDFC

Mr. K. M. Tariq

(resigned 21/5/1997)

Mr. S. Abbas Husain

(appointed 21/5/1997)

Nominee, Government of Balochistan

Auditors

The retiring auditors Messrs. Ford, Rhodes, Robson, Morrow, Chartered Accountants being eligible,

offer themselves for re-appointment.

Shareholding Pattern

A statement reflecting the distributions of shareholding is attached to the Annual Report.

By Order of the Board

Karachi - August 06, 1997

D. M. Woodroffe

Chief Executive

AUDITORS' REPORT TO THE MEMBERS

We have audited the annexed balance sheet of The Hub Power Company Limited as at June 30, 1997

and the related profit and loss account and statement of changes in financial position, together with the

notes forming part thereof, for the year then ended and we state that we have obtained all the information

and explanations which to the best of our knowledge and belief were necessary for the purposes of our

audit and, after due verification thereof, we report that:

(a) in our opinion, proper books of account have been kept by the Company as required by the

Companies Ordinance, 1984;

(b) in our opinion:

(i) the balance sheet and profit and loss account together with the notes thereon have been

drawn up in conformity with the Companies Ordinance, 1984 and are in agreement with the

books of account and are further in accordance with accounting policies consistently applied;

(ii) the expenditure incurred during the year was for the purpose of the Company's business;

and

(iii) the business conducted, investments made and the expenditure incurred during the year

were in accordance with the objects of the Company;

balance sheet, profit and loss account and the statement of changes in financial position, together

with the notes forming part thereof, give the information required by the Companies Ordinance,

1984 in the manner so required and respectively give a true and fair view of the state of the

Company's affairs as at June 30, 1997 and of the profit and the changes in financial position for

the year then ended; and

(d) in our opinion no Zakat was deductible at source under the Zakat and Ushr Ordinance, 1980.

Ford, Rhodes, Robson, Morrow

Karachi - August 12, 1997

Chartered Accountants

PROFIT AND LOSS ACCOUNT

FOR THE YEAR ENDED JUNE 30, 1997

1997

Note

(Rs. '00Os)

Turnover

18,308,284

Operating costs

(8,924,878)

----------

GROSS PROFIT

9,383,406

Selling, general and administration expenses

(110,652)

----------

OPERATING PROFIT

9,272,754

Other income

414,962

----------

9,687,716

Other expenses

(164,098)

Financing costs

(2,183,296)

----------

NET PROFIT FOR THE YEAR

Unappropriated profit brought forward

7,340,322

----------

Unappropriated profit carried forward

7,340,322

===========

EARNINGS PER SHARE (RUPEES)

6.34

===========

The annexed notes form an integral part of these accounts.

D. M. Woodroffe

I.M.H. Preston

Chief Executive

Director

BALANCE SHEET AS AT JUNE 30, 1997

Note

1997

1996

(Rs. '000s)

TANGIBLE FIXED ASSETS

Operating fixed assets

46,944,038

72,464

Capital work-in-progress

21,763

35,125,082

PROJECT DEVELOPMENT AND

IMPLEMENTATION COSTS

10,070,481

LONG TERM DEPOSITS, PREPAYMENTS AND

DEFERRED COSTS

2,402,958

2,536,409

CURRENT ASSETS

12,823,401

3,899,371

------------

62,192,160

51,703,807

SHARE CAPITAL AND RESERVE

===========

Share capital

Authorised, issued, subscribed and paid-up

11,571,544

Revenue reserve

Unappropriated profit

7,340,322

------------

18,911,866

11,571,544

LONG TERM LOANS

36,974,978

33,645,264

DEFERRED LIABILITY

2,160

1,495

CURRENT LIABILITIES

6,303,156

6,485,504

COMMITMENTS AND CONTINGENCIES

------------

62,192,160

51,703,807

===========

The annexed notes form an integral part of these accounts.

STATEMENT OF CHANGES IN FINANCIAL POSITION

(CASH FLOW STATEMENT)

FOR THE YEAR ENDED JUNE 30, 1997

1997

1996

Note

(Rs. '000s)

CASH FLOW FROM OPERATING ACTIVITIES

Net profit

7,340,322

Adjustment for non cash charges and other items:

Depreciation

841,083

Amortisation of deferred costs

76,275

Profit on sale of fixed assets

(196)

Staff gratuity

665

Interest/mark-up on secured loans

1,888,042

------------

2,805,869

------------

Operating profit before working capital changes

10,146,191

Working capital changes

(3,679,483

Interest/mark-up paid on secured loans

(1,599,885

------------

Net cash inflow from operating activities

4,866,823

CASH FLOW FROM INVESTING ACTIVITIES

Fixed capital expenditure (net)

(2,539,425

10,087,123)

Loss on sale of fixed assets

Staff gratuity

477

Sale proceeds of fixed assets

764

630

Long term deposits, prepaymerits and deferred costs

57,176

(131,560)

Long term receivables

121,923

Working capital changes

(6,086,322)

------------

Net cash (outflow) from investing activities

(2,481,485)

(16,181,951)

CASH FLOW FROM FINANCING ACTIVITIES

Proceeds from issue of share capital

1,390,062

Long term loans

4,815,651

15,860,223

Long term liabilities

(444,787)

Repayment of obligations under finance lease

(1,089)

(829)

------------

Net cash inflow from' financing activities

4,814,562

16,804,669

------------

Net increase in cash and cash equivalents

7,199,900

622,718

Cash and cash equivalents as at July 1, 1996

1,087,121

464,403

------------

Cash and cash equivalents as at June 30, 1997

12.3

8,287,021

1,087,121

===========

WORKING CAPITAL CHANGES

(Increase)/decrease in current assets

Stores and spares