Pakistan's gas distribution sub-sector is comprised of two regional, state regulated monopolies, SSGC and SNGPL. SSGC is responsible for transmission and distribution of natural gas in the south of the country, with exclusive distribution and sale licence in Sindh and Balochistan.
The core business of the company is to purchase natural gas from E&P companies and its distribution and selling. Besides this, it is also engaged in the manufacturing and sale of gas meters, sale of gas condensate and import of LPG.
The company's transmission system is comprised over 3000 kms of high-pressure pipelines. The network stretches from Sui in Balochistan to Karachi in Sindh. The network of 27540 kms covers over 1126 towns in the two provinces hence catering up to 28% of the country's gas requirements. During FY07, the power sector was the largest segment with Karachi Electric Supply Corporation (KESC), being the single largest customer, accounted for 22 percent of sales by volume and 25 percent by value.
Besides this, SSGC operates the only gas meter manufacturing plant in Pakistan with a capacity of over 510,000 meters. SSGC's meter manufacturing plant produced a record 550,150 meters, during FY07, while operating at 177 percent of its capacity.
The customer base had been increased from 1.86 million in 2005-06 to 1.94 million in 2006-07. During the period under review, the company provided 90,122 new domestic connections, while adding 1,720 commercial and 297 industrial customers to its customer base.
SSGC has embarked upon a five-year expansion programme for network extension and capacity enhancement. The company also seeks to add 600 new towns and villages to its network and increase its customer base.
SSGC is working on laying a new pipeline in Balochistan that would help it to supply 130mcf gas to Quetta while the strategically located gas field in Zarghun would help to inject gas to load centers of Quetta, Ziarat and other adjoining areas. An agreement had already been signed for the supply of 150mcf from the Zamzama field.
SSGC has signed an accord with Shell for the LNG Mashaal Project. Pakistan's gas demand and supply projections indicate a widening gap of approximately 500 million cubic feet per day (MMFCD) by the year 2010. The gap started to emerge in 2007-08 and builds up to 2,100 MMFCD by 2015, as the current gas fields gradually go off plateau.
Any commitments of additional gas supplies to industries, power or fertilizer plants on a long-term basis are therefore not possible, without confirmation of additional sources of gas supply. This may be possible through an import gas pipeline, which at the earliest could come on-stream by 2015 as per the Gap Coverage Strategy or alternately a major on-shore/off-shore gas field discovery in the current year (the gas to market period being five years). A third alternate is the LNG import option, which as per current assessment will be able to provide gas by the year 2010/11.
To this end GOP has nominated SSGC as the project facilitator for the establishment of 3.5 million tonnes per annum (mtpa) (equivalent to 500MMFCD of gas) LNG import project with a re-gasification facility to be located in the vicinity of Karachi. It is estimated that the gas would be available through LNG import in the year 2010/11.
FY07 witnessed a decline in profitability of gas distribution sector of 35.7% mainly on account of the problem of Unaccounted for Gas (UFG) and uniform pricing system by OGRA.
In tandem with this industry wide trend, the profits of SSGC also declined 67.4% for FY07 with profit after tax dropping to Rs 0.290 billion as compared to Rs 0.892 billion in FY06. This effect was seen despite an 11% increase in sales revenue during the year.
The company also incurred higher financial costs in FY07, owing to the additional long-term sources of financing taken up by the company. During the year, SSGC subscribed to Sukuk Bonds, and also took up additional long-term loans. Consequently, the financial charges have gone up by 30%. This resulted in a further pull on profits.
Moreover, the company also suffered losses as a result of sabotage on gas pipeline installations, mounting to Rs 250 million. This figure would have been much higher, had it not been for the remote control operation of pipeline block valves that had particularly improved the efficiency and safety of the high-pressure pipelines.
Consequently, the profit margins have dropped to dangerous levels, much below the profit margins of its counterpart in the north.
The FY06 witnessed a sales volume growth of 6% and corresponding sales value increase of 26%. The profitability of the company, however, declined despite the sales growth. This trend of declining profitability is common for both companies in this industry.
The fading profitability is largely a result of the rising cost of gas. In FY06, the cost of gas increased by 27%. This inflating cost of gas pulled down the profit margins for the industry. Sizeable penalties paid to OGRA for high distribution losses also greatly eroded profitability. An increase in salaries and benefits further added to expenses.
Most of the loans acquired by SSGC are based on KIBOR and the tight monetary policy pushed the rates even higher. Financial cost increased by 147% in FY06 as a result of an increase in loans and because of rising interest rates.
The other operating income however, increased in the same period. These factors added up to lower the profitability of SSGC, causing it to drop below the profit margin of the other industry player.
The company's liquidity position has been declining over the five years studied. In the FY06, SSGC lost its superior liquidity position to SNGPL and the difference between the current ratios of the companies has been increasing since then.
FY07 followed the same trend, with the current ratio declining to a marginal level. A further drop in the ratio will bring the company at the red zone, and would reflect negatively on its financial strength.
The inventory turnover (days) improved slightly for FY07 but its effect on the operating cycle was marred by a substantial increase in the collection period of receivables. This contrasts with a decrease in inventory turnover and increase in DSO for SNGPL. As a result, SSGC ended the year with a longer operating cycle. It would be advisable for the company to focus on speeding up its collection process in order to increase its efficiency and lower costs. Hence, in terms of generating cash from gas purchases, SSGC lags behind its counterpart in the north.
SSGC has a superior position in the industry in terms of the total asset turnover and sales to equity although total asset turnover has been declining since the FY04. In the FY06, the sales to equity reached its peak over the five-year period.
The debt ratios of SSGC reflect its standing as a largely debt financed company.
The debt to equity and long-term debt-to-equity has been on an increasing trend for the last few years and the trend continued in the FY06 and FY07. Shrinking equity due to declining profitability and consequently lower un-appropriated profit account influenced this trend.
In the FY06, SSGC also acquired more long-term loans to finance its capital expenditure. Increases in creditors and short-term borrowings also boosted the ratios. During the year 2007, SSGC subscribed to Sukuk Bonds, and also took up additional financing in the form of long-term loans. Consequently, the financial charges have gone up by 30%. This has resulted in a decline in the interest coverage ratio, TIE.
Despite this, SSGC has been able to maintain lower levels of debt to equity, long term debt to equity and debt to assets than the other regional monopoly. This suggests lower levels of leverage for SSGC.
The EPS declined to Rs 0.43, compared to Rs 1.33 in FY06. Consequently, the dividend per share declined to Rs 0.5 for the period. The dividend per share for FY06 was steady at the FY05 level. The graph indicates that DPS has the tendency to move, on an average, in step with EPS. This reflects positively on the company's dividend policy from the standpoint of investors.
Both the EPS and DPS stayed much below those of the other player in the industry. The book value has been on a receding trend since FY06, all the while remaining below those of the industry average.
The graph compares the company's stock with the KSE 100 Index. As illustrated, the company performance has not been very encouraging, compared to the index. In the last part of the calendar year 2007, especially, the company's stock performance has remained below the index.
In July 2007, the Pakistan Credit Rating Agency (Pacra) assigned the long-term entity rating of 'AA-' (Double A minus) and short-term rating of "Al+" (A One Plus) to Sui Southern Gas Company Limited (SSGCL). The ratings denote a very low expectation of credit risk and a very strong capacity for timely payment of financial commitments.
This reflects on the low financial and business risks of SSGC, derived from the Government of Pakistan-guaranteed return of 17 percent on its net average operating assets, which continue to grow in pursuance of the company's aggressive network expansion plan. The ratings also take into account the company's strong cash flows, sound financial coverage and adequate liquidity. Due to capital-intensive nature of the industry and government regulations, SSGC is likely to maintain its monopoly in its area of franchise (Sindh and Balochistan).
The company maintained high level of capital expenditure during fiscal year 2006 and first 9 months of fiscal 2007. The resulting expansion in company's network is expected to have a positive impact on profitability and also enables the company to take advantage of future gas discoveries.
Unaccounted for Gas (UFG) is a major problem for SSGC as it leads to substantial erosion of profitability of the company. UFG is the difference between the amount of gas purchased and the amount of gas sold. In the FY06, therefore, SSGC made efforts to reduce the amount of UFG and as a result managed to bring down the overall percentage of UFG from 7.39% in FY05 to 6.75% in FY06. Despite this reduction, the company had to suffer penalties enforced by OGRA on account of UFG.
The gas distribution utilities in Pakistan had been following a formula based on the provisions agreed upon with the Asian Development Bank. This formula allowed SSGC a rate of return on the EBIT level of 17% on net assets. Now, the OGRA has proposed a new gas tariff regime which allows for a variable rate of return based on 8% KIBOR for six months. Besides this, OGRA has also specified lower and upper targets for UFG whereby savings due to higher than targeted performance are retained y the companies.
It is hoped that the new tariff regime proposed by OGRA will improve efficiency and enable better utilization of resources. Hence the company's performance is likely to improve as a result of the new regime. Moreover, as the expansion plans are implemented and the enhanced capacity comes online, the company will be able to enjoy higher net sales and the company's efforts to reduce UFG will help reduce costs, thereby accentuating profitability.
=======================================================================================
INCOME STATEMENT FY'03 FY'04 FY'05 FY'06 FY'07
---------------------------------------------------------------------------------------
Net sales 34,836,457 44,799,690 52,702,677 66,303,588 69,084,403
Cost of gas 28,060,613 38,713,079 46,812,706 59,594,477 63,157,107
Gross profit 6,775,844 6,086,611 5,889,971 6,709,111 5,927,296
Operating Expenses 5,317,894 5,551,557 6,329,966 6,749,199 6,882,423
other operating income 1,463,599 1,732,894 2,591,689 3,150,774 4,069,092
EBIT 2,921,549 2,267,948 2,151,694 3,110,686 3,113,965
Financial charges 872,548 695,597 563,017 1,390,460 1,778,740
Profit before taxation 2,049,001 1,572,351 1,588,677 1,720,226 1,335,225
Taxation 601,110 575,639 576,176 828,509 1,044,846
Profit after taxation 1,447,891 996,712 1,012,501 891,717 290,379
---------------------------------------------------------------------------------------
BALANCE SHEET FY'03 FY'04 FY'05 FY'06 FY'07
---------------------------------------------------------------------------------------
Total Equity 10,512,029 10,354,332 10,365,802 10,341,470 9,738,903
Non-current liabilities 11,572,151 11,234,632 14,524,412 17,169,048 22,800,392
Current Liabilities 8,151,596 10,247,859 12,792,279 19,569,183 29,380,594
Total Liabilities 19,723,747 21,482,491 27,316,691 36,738,231 52,180,986
Non-current assets 17,524,097 17,841,503 22,000,891 25,338,511 31,750,185
Current assets 12,711,679 13,995,320 15,681,602 21,741,190 30,169,704
Cash and bank balances 2,629,138 3,040,784 1,269,203 3,814,642 5,267,639
Total Assets 30,235,776 31,836,823 37,682,493 47,079,701 61,919,889
---------------------------------------------------------------------------------------
LIQUIDITY FY'03 FY'04 FY'05 FY'06 FY'07
---------------------------------------------------------------------------------------
Current Ratio 1.56 1.37 1.23 1.11 1.03
---------------------------------------------------------------------------------------
ASSET MANAGEMENT FY'03 FY'04 FY'05 FY'06 FY'07
---------------------------------------------------------------------------------------
Inventory Turnover(Days) 7.64 6.56 6.66 6.00 5.84
Day Sales Outstanding 61.41 44.34 50.42 50.58 67.70
Operating cycle (Days) 69.05 50.90 57.08 56.59 73.54
Total Asset turnover 1.37 1.71 1.66 1.65 1.38
Sales/Equity 3.95 5.26 6.03 7.50 8.80
---------------------------------------------------------------------------------------
DEBT MANAGEMENT FY'03 FY'04 FY'05 FY'06 FY'07
---------------------------------------------------------------------------------------
Debt to Asset 65.23% 67.48% 72.49% 78.03% 84.27%
Debt/Equity (Times) 1.88 2.07 2.64 3.55 5.36
Times Interest Earned (Times 1.10 1.09 1.40 1.66 1.75
Long Term Debt to Equity 3.35 3.26 3.82 2.24 2.34
---------------------------------------------------------------------------------------
PROFITABILITY FY'03 FY'04 FY'05 FY'06 FY'07
---------------------------------------------------------------------------------------
Gross Profit Margin 16.30 11.18 9.42 8.65 6.91
Net Profit Margin 3.48 1.83 1.62 1.15 0.34
Return on Asset 4.79 3.13 2.69 1.89 0.47
Return on Common Equity 13.77 9.63 9.77 8.62 2.98
---------------------------------------------------------------------------------------
PER SHARE FY'03 FY'04 FY'05 FY'06 FY'07
---------------------------------------------------------------------------------------
Earning per share 2.16 1.49 1.51 1.33 0.43
Dividend per share 1.75 1.80 1.49 1.49 0.50
Book value 15.66 15.43 15.44 15.41 14.51
=======================================================================================