Nothing seems to be going right for the gas distribution business in Pakistan. Just like SNGP, its southern counterpart SSGC announced disappointing financial results for FY09 on Tuesday. Badly hit by losses stemming from Unaccounted-for-Gas (UFG), hefty financial charges and huge exchange losses on gas purchases the firm saw a 4-times drop in earnings over last year.
Unlike its peer, however, SSGC recorded a growth of 5 percent in volumetric sales augmenting from 100,000 plus new connections during the period. Average gas tariff increased by 30 percent during FY09 leading to a sizeable growth in overall revenues. However, 32 percent increase in the weighted average cost of gas (WACOG) shrunk the gross margins to 5.3 percent.
Earthquake in Balochistan, together with a cold winter and new connections led to substantial increase in UFG losses that had soared 8.26 percent in just the first nine months. And since, OGRA allows 5.5 percent of UFG losses to SSGC for its guaranteed 17 percent return, the extra loss booked in that account offset the impact of higher revenue. It should also be of important mention that management had predicted 7 percent UFG losses for the year and did not incorporate the actual losses incurred during 9MFY09 - which is why FY09 results pose such bleak picture.
The firms profitability also got affected by 23 percent currency depreciation during the period which more than doubled the exchange losses incurred on account of gas purchase payments. Another dent to the bottom line was caused by 86 percent rise in interest expense as the firm had to rely heavily on external financing for its capex plans and to arrange short-term borrowings to meet its higher working capital requirements caused by the circular debt crisis.
A much needed breather though was provided by non-operating income and other income without which SSGC bottom line would have been painted all in red. Royalty income from JJVL and higher contribution from meter rentals is likely to have contributed to higher other income, whereas, non-operating income got the boost from interest income earned from KESC, Wapda and other related parties.
Going forward, UFG losses remain a big concern as the allowed limit of 5.5 percent is often cited as a difficult target by SSGCs management and is likely to erode the firms profitability in the future. However, the magnitude of UFG losses might reduce a bit as WOCAG is expected to be considerably lower in the first half of FY10. Moreover, SSGCs capex plans for FY10 also seem to have hit by OGRAs refusal to allow the requested amount of Rs 9.2 billion - allowing only Rs 5.5 billion which could result in a slowdown in network expansion.
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SSGC P&L
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RS (MN) FY09 FY08 CHANGE
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Sales 108,151 74,626 45%
Cost of gas 102,389 69,238 48%
Gross profit 5,762 5,387 7%
Gross margins 5.33% 7.22% -26%
Transmission & dist exp 8,503 7,147 19%
Other expenses 2,353 968 143%
Non operating income 3,810 1,772 115%
Finance cost 4,410 2,371 86%
PAT 257 991 -74%
EPS (Rs) 0.38 1.48 -74%
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Source: company results