OGRA has announced its decision on the petition filed by Sui Companies for the revenue requirement of FY25.
Sui Northern Company Limited (SNGP), in its petition, requested an increase in the gas price by ~Rs475/mmbtu to bring the average price to Rs2,277/mmbtu for FY25. However, OGRA, in its determination, recommended decreasing the gas prices by Rs180/mmbtu to an average price of Rs1,636.
The major difference between OGRA’s review and the SNGP petition is the disallowance of the Late Payment Surcharge (LPS) of Rs123bn and the lower-than-requested RLNG diversion cost, leading to a differential of Rs114bn. These two accounts explain 88% of the variation in both concerned parties. A snapshot of the variation is presented in a table on the next page.
How in history has OGRA treated LPS and RLNG cost diversion?
Late Payment Surcharge (LPS Payables): In FY22, SNGP asked for Rs46bn on account of LPS, however, in Final Revenue Requirement (FRR) of FY22, OGRA allowed a meagre Rs387mn. In FY23, OGRA not allowed in its Review Estimated Revenue Requirement (REER) for any adjustment on this account against requested number of Rs32bn. Similarly, In FY24 there was no mention of LPS in REER of SNGP. For FY25, OGRA has again disallowed LPS adjustment in tariff determination citing that these payables along with LPS in respect of state owned enterprises is matter of circular debt and same burden can not be shifted to general consumers. We believe, this will not be allowed in tariff determination, in line with the historical treatment.
Cost of RLNG diverted to consumers: SNGP requested for Rs298bn on account of RLNG diversion, however, OGRA in its determination has allowed Rs184bn, Rs114bn lower than requested amount. In reasoning, OGRA has advised petitioner to provide due justification for diverted volumes to domestic sector and based on the previous years trend, OGRA allowed 65% of the requested volumes. SNGP increased estimates of cost of RLNG as they accounted for the subsidy of fertilizer manufactures running on RLNG, as per our channel checks. To note, OGRA started passing this cost to consumers in FY24 by allowing Rs232bn to SNGP in its FY24 REER. While, no pass through was allowed in FY23 and FY22.
Impact on SNGP: Its too early to gauge any impact on SNGP as this is just ERR and assumptions/workings are finalized in FRR. However, in a significant development, OGRA has allowed 25.92% return (20.64% allowed in FY24 REER) on net operating asset of SNGP against requested return of 27.4%. The difference has arisen as super tax (10%) treatment will be taken at later stage. In absolute term, Return is projected to be Rs37bn (Local gas: Rs28bn + RLNG: Rs9.4bn). Net of UFG disallowance, return for FY25 is estimated at Rs28bn.
OGRA has allowed 25% of the finance cost for RLNG business borrowing (Rs110bn in ERR, local gas business borrowing is not available). This translates into unallowed finance cost of Rs18bn. Adjusting for disallowed UFG quantum and interest expense, the projected before tax income for SNGP would be Rs10.3bn and after tax income would be Rs10/share. This estimate is subject to actual pass through of finance cost, and UFG quantum (we have taken UFG disallowed quantum from ERR). Since projected before tax income of SNGP falls in super tax regime, we believe, return of 27.4% would be applicable on SNGP. In this case, projected after tax income would be Rs12/share. As per our channel checks, SNGP has taken borrowings after building an understanding with OGRA that finance cost will be pass through and our channel checks suggests that, in FRR, finance cost would be passed on to consumers due to the reasons mentioned above. If this happens, this will be a sizeable upside to earnings.
Impact on gas sector circular debt: We believe, its too early to comment whether there will be any annual pileup of the gas sector circular debt considering its exposure to oil prices, exchange rate, and accounting to RLNG diversion amongst others. In macro assumptions OGRA has assumed exchange rate Rs278-280 for FY25, which we believe is on the lower side and would warrant a revision in future. This can create a shortfall of Rs20-30bn in our view by assuming PKR/USD 300. While, the actual RLNG volumes diverted to consumers will be the key in determining any pileup in circular debt. We believe, under IMF program, Govt. will adapt prudent/cautious approach while deciding on gas prices for consumers.
Courtesy – Topline Research
