UFG - a crushing realty for the gas distribution companies

Internationally there are mostly two reasons for Unaccounted-For-Gas (UFG) losses: leakages in the system and measurement errors. Unluckily, in Pakistan there is another reason that contributes the most to UFG losses for gas distribution companies. Yes, you guessed it right - the third-party damages signified by unauthorised construction, terrorism elements and gas thefts.
The two gas distribution companies, SSGC and SNGPL, have remained under duress due to the increasing incidence of gas thefts, meter tempering and pipeline blasts. In such adversity, UFG benchmarking has attracted a lot of upheaval.
Although the overall profitability of the gas distribution companies improved by an impressive 17.8 percent during 9MFY12 over comparable period last year, according to the analysts at Investcap, the surge in bottom line is attributed to the rise in other non-operating income and the operating assets.
Besides, analysts believe that the profits of the gas distribution sector were reined in by 10 percent YoY rise in Unaccounted-For-Gas (UFG) losses and further debilitating of liquidity by an increase in financial charges amid the circular debt.
As of now, the GDCs are at crossroads. On one hand, they believe that the UFG benchmark of 5 percent internationally is not realistic given the situation in the country. On the other hand, with the limit hovering at 7 percent as of now, they also believe in bringing down the UFG losses as anything beyond 7 percent it axed from their profits that agitates the shareholders.
While demanding for a more realistic benchmark, the two players in the gas distribution sector are left with little time to take advantage of the higher UFG limit and should brace for another tightening as OGRA plans to lower the scale further down to 5.5 percent for FY13.
Where all around the world, the utilities are propped up by the government; Pakistan is likely to continue facing additional third-party damages coupled with mounting circular debt. However, a ray of hope could still glister through these choppy times with the implementation of gas theft act and not so much by Natural Gas Efficiency Project for UFG reduction to be initiated by $250 million loan from WB that could further boggle the profitability and liquidity of the sector.