Sui Southern Gas Company Limited

July 17, 2012

RECORDER REPORT

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Sui Southern Gas Company (SSGC) is Pakistan's leading integrated gas company engaged in transmission and distribution of natural gas that extends from Sui in Balochistan to Karachi in Sindh. Government of Pakistan owns majority of the shares in the company which is above 70 percent.

The company covers transmission and distribution in 1,200 towns in Sindh and Balochistan consisting of 3,220 kilometres of high pressure pipeline with diameters ranging 12-30 inches. Besides gas transmission and distribution, the company is also the sole manufacturer of gas meters with installed capacity of over 750,000 meters annually.

Gas supply deflated by the prevailing shortage

Being one of the two largest gas distribution and transmission companies, SSCG continues to face natural gas shortage due to the widening schism between the supplies from the E&P companies and burgeoning natural gas demand. No wonder the supply of gas marginally increased during the 9MFY12 by a tad 0.21 percent to 300.64 BCF, compared to 9MFY11 volume.

Where the average gas well head purchase prices are concerned, there was an increase of 10 percent to stand at Rs300.93mmbtu versus Rs271.96mmbtu of similar period FY11.

Moderate effects on gas sales volumes

Fortunately the ballooning up of supply constraints faced by the country did not translate into a fall in gas sales for SSGC, due to better management at the gas utility. A meager one percent fall in the gas sales volumes amid extensive volatility on the supply end was commendable during the nine months of FY12.

The average gas sales price increased by 16 percent to Rs379.3 mmbtu due to rise in prices notified for the consumers, by Oil and Gas Regulatory Authority (Ogra). On the whole, the revenue from the main business activity - gas sales - increased by 14.7 percent. The growth in gas revenues was partly subdued by a slowdown in gas supply.

Operational activities continue amidst challenge

SSGC in its franchise area, Sindh and Balochistan, extended its gas distribution system by 1,101 km during the first nine months of FY12. Further 143 km of distribution lines were laid to prevent leakages.

A highlight of the year has been the inauguration of 29 km Kunnar- Pasakhi pipeline project which incurred a capital expenditure of Rs1,026 million. The said pipeline is expected to add 100mmcfd of gas to the distribution system.

With a total of 94,236 gas connections, majority of them in the domestic sector, the customer base of the company increased to 2.457 million connections which also included commercial and industrial consumers.

The performance by the gas meter manufacture increased by only one percent with 492,336 meters produced during 9MFY12 versus 485,936 meters in the corresponding period FY11. Unlike the first quarter where the sales of meters to SNGPL plunged by nine percent resulting in a fall in meter manufactured by SSGC, the 9MFY12 was able to pull up the meter demand by five percent YoY.

Overall profitability diminished

Though the gross profit were healthy and the margins showed some improvement for the period under review, the net earnings of the company fell by five percent YoY for 9MFY12. Likewise, the net margins also dwindled from 2.6 percent in 9MFY11 to 2.2 during 9MFY12.

The profitability primarily softened due to the finance cost borne by the company which accounts for five percent of the net sales, and the unaccounted-for gas (UFG) scenario. For the period ending March 31, 2011, the finance cost incurred an increase of 34 percent YoY. This had an immediate impact on the profitability which fell as a result.

Unaccounted-for-gas remains the most pressing issue for the gas utilities. SSGC was unable to sustain the UFG limit and incurred a level of 11.23 percent during 9MFY12. In essence, SSGC suffered a reduction of Rs3,651 million in its revenues during the nine months compared to due to excess UFG.

Asset efficiency losing promptness

The efficiency and profit earning capacity of the assets in general seems to flex gradually. Stalled asset turnover and hence total asset turnover depicts an increasing asset base with lopsided sales revenue growth.

The receivables turnover has also lost pace as trade receivables from KESC have been tricky for the company. Being the largest customer, the impact of any mismanagement is huge. This component of the inter-corporate circular debt continues to create a challenging milieu for SSGC.

Similarly the company receivables also include that from PSML. However, the company is expecting some resolution in this regard as it is a public sector entity.

Satisfactory short-term liquidity but questionable long-term solvency

Short-term liquidity seems to be in check for SSGC; but the concern for the company should be the part-financing of investments and capital expenditures from short-term borrowings. This has dented the cash flows of the company, and the main contributor to the agony have been the receivables.

Future projects and outlook

The issue that the company can control on its own is the UFG and the T&D losses. SSGCL has recently been granted 200 million dollars loan by the World Bank to address the issue of ageing gas meters, under the Rs26 billion funded natural gas efficiency project.

The project entails UFG reduction through rehabilitation and leak ratification of pipelines, while also upgradation of meter system.

Meanwhile, the company has already started to provide 100mmcfd gas to KESC where it has established two 50mmcfd each LPG air mix plants at Port Qasim, to address the gas shortage in the country.

The power crisis during peak summer times also continues to be affected by the curtailment of gas to KESC. In order to fight the circular debt challenge, the company has also been working up for the LNG import infrastructure. However, the imports of liquefied natural gas plans seem to have hit a snag.