HUB Power Co (HUBC), Pakistan’s second-largest non-state power producer, may seek court intervention if the government fails to make payments owed to the company’s Narowal plant, Bloomberg reported

“When dues are not being paid on time, operating the plant is quite tough,” Chief Executive Officer Zafar Iqbal Sobani said in an interview in Karachi. Under the terms of a guarantee invoked by Hub, the government is liable to pay 11.2 billion rupees ($117 million) this week of the 16 billion rupees owed to the 220-megawatt plant, he said.

Private electricity producers in Pakistan are struggling to operate their plants because of non-payment by state-run grid companies for the power they purchase. The delays lead to so-called circular debt in the nation’s energy industry that amounts to as much as 400 billion rupees, according to Foundation Securities Ltd. in Karachi. After prolonged negotiations with the government over several months, some power producers are seeking legal recourse as cash constraints curb output.

In June, eight private power producers including Nishat Chunian Power Ltd. and Orient Power Co. filed a petition in the Supreme Court seeking recovery of 62 billion rupees. In August, the court ordered the government to make part of the payment, according to Abdullah Yousuf, chairman of the Pakistan Independent Power Producers Advisory Council in Islamabad. The next hearing is on Dec. 4.

“The cash crunch for Hub Power appears to be getting worse in coming days,” said Shahid Ali, research head at M.M. Securities in Karachi. “Local players have replaced foreign investors who left and the new management, in my opinion, will find it difficult to pressure the government for the payment of outstanding amounts.”

The government owes a total of 95 billion rupees to Hub Power’s two plants in overdue payments and the power producer in turn is late on 65 billion rupees of payments to Pakistan State Oil, the biggest fuel retailer, said Sobani.

“We are stretched and trying our best to get the money,” he said. “If we don’t get money properly, we may have to close the plant because of non-availability of fuel. The option is to go to the Supreme Court like the other companies did and get results.”

The Karachi-based Dawood Group owns a 19 percent stake in Hub Power after International Power Plc from the UK and Saudi- based Xenel Industries Ltd. sold a combined holding of 29.5 percent in the financial year ended June 30. Hub Power reported an increase of 54 percent in net income to a record 8.58 billion rupees in the year ended June 30, according to data compiled by Bloomberg. The company has paid dividends to shareholders twice a year for at least the past decade.

“It’s very challenging to service the dividend,” said Sobani, 55, who became CEO in 2011. “We don’t have any major change in the dividend policy but all will depend on the cash flow.”

The company is expected to pay a dividend of 6.50 rupees a share in the year ending June 2013, according to the median estimate of seven analysts in a Bloomberg survey.

The company plans to start commercial operations on its $233 million hydro plant in AJK by April, Sobani said. Hub Power has a 75 percent stake in the subsidiary company Laraib Energy Ltd. that is building the 84-megawatt plant, Pakistan’s first private hydro producer. “Revenue stream from this plant should begin in 2013-14,” he said.

Pakistan is seeking to set up power plants to help overcome a record electricity shortage that has closed factories and led to violent protests nationwide.

Hub Power, the second-largest after Kot Addu Power Co., supplies 1,292 megawatts a day from its Baluchistan-based oil-fired thermal power plant, according to its website.