The management of SSGC held a corporate briefing session on 8th May’23 to discuss the company’s future outlook.

Brief Takeaways

· The last announced the financial result of SSGC was for 1QFY22, with earnings set at PKR 736mn (EPS: PKR 0.84) vs. a loss of PKR 721mn (LPS: PKR 0.82).

· During the aforementioned quarter, the UFG of the company clocked in at 13.75% vis-à-vis 14.02% in 1QFY21. It was 15.31% (55,557mmcf) in 2021.

· The company has a transmission network of 4,143 KMs, whereas the distribution network is spread over 49,098 KMs, serving 3.2mn consumers.

· The govt has a direct holding of 53% in SSGC and another 22% in indirect holding.

· RLNG made up 14% of the total gas sales of SSGC in 2022 with the remaining 86% contributed by indigenous gas sales.

· Further breakup revealed that out of the 830mmcfd in gas sales of the company, consumption was split between domestic consumers (39.8%), captive power (23.0%), general industry (19.2%), power (8.5%), FFC Fertilizer (5.9%), commercial (2.7%), Cement (0.4%) and CNG (0.4%).

· Natural depletion of indigenous gas is estimated at 8% per annum in Pakistan.

· Due to a high concentration of domestic consumers, challenges for the company are also very significant.

· From FY19, UFG has come down from 18.28% (77,700mmcf) to 15.17% (45,397mmcf) in FY23 (projected).

· UFG is planned to be reduced to 45 BCF by the end of FY23. It has been drastically reduced from 78 BCF to 52 BCF in the last five years (up to FY22) due to rigorous implementation of the UFG reduction plan.

· The management has taken massive steps to control UFG in Baluchistan (10% of total gas sales), where UFG was 51.31% (55,557mmcf) in FY21. Significant quantum of this is accumulated in the November to February period, given the region’s severe weather.

· Moreover, 70% of gas sales are made to Karachi so it was important to focus on UFG control activities here, particularly for domestic consumers.

· UFG in Karachi has come down 8% since Oct’22 against 9.6% (21,302mmcf) in FY21. Areas such as Lyari and Malir will be rehabilitated in the next 12 months. Therefore, it is now closer to the allowable UFG level of 7.6%.

· Ex-Baluchistan, UFG of SSGC was 12% in FY21 (15.1% in Interior Sindh) and total UFG with Baluchistan was 15.3%.

· Every 1% change in UFG impacts bottom-line of SSGC by PKR 2bn, as per management.

· Two key things that weigh down the balance sheet of SSGC are receivables from Pakistan Steel Mills and K Electric. Once these two are sorted, the balance sheet will be mostly cleared.

· Pakistan Steel Mills (PSM) owes the company a hefty PKR 48bn since its shutdown (principal + admitted LPS). LPS has not been fully recorded on this, and if recorded, it will result in a one-time gain on the balance sheet.

· To resolve this issue, debt swap of 1,229 acres of steel mills land is expected for a period of 60 years, with the company working on this solution since last year. It is expected that OGRA may allow return on land as one of the options. Meanwhile, this land can also be used for other activities to generate income.

· Similarly, K Electric also owes the company and it is expected that this will be cleared by the end of 2023.

· The company has a claim of PKR 81bn on account of RLNG Volume handling for FY22. This claim is in accordance with ECC Guidelines to OGRA and pending OGRA appointed Consultant Report. Once OGRA sorts this, it will have a major impact on financials of the company. This (UFG on RLNG handling) is the major factor causing a deferential between the performance of SSGC and SNGP.

· Additionally, OGRA has appointed a consultant to determine the inter-enterprise liabilities of both Sui Companies before Jun’20, the report of which is yet to be received.

· Moreover, cashflow issues continue as latest price hike was insufficient (as at June 30, 2021, receivable on account of tariff adjustment against indigenous gas stands at PKR 208bn). The management views that a bigger hike is needed to address the circular debt issue.

· SSGC owns and operates the only Domestic Gas Meters Manufacturing Plant in Pakistan with substantial vertical integration in-house.

· Recently, SSGC has achieved a major milestone on account of technology transfer to locally produce the Measuring Unit for G-4 gas meters, which were being imported earlier for 3rd Gen of G-4 Domestic Gas Meters.

· Localization of these meters has reached nearly 97%, which means costs have been controlled by 30-40%. Some more capex will allow the capacity to go to 2.5mn units from 1mn units annually currently, on single shift basis.

· The company will soon commence exports of these meters to Middle East and other countries.

· P&L statement of SSGC is impacted by three major factors: UFG, capex for new projects, and non-operating income.

· For the last one, the company has commenced a new venture SSGC Alternate Energy (a subsidiary), whereby SSGC has identified fields where it will bring unallocated gases to consumers on competitive terms (this is estimated at 80mmcfd, translating to income of PKR 6-8bn). This will come online by Sep-Oct’23.

· Furthermore, for the past many years, the company has been selling industrial quality gas to domestic consumers. This is not needed. Therefore, SSGC now plans to undertake exchange of natural gas with nitrogen production leading to optimization of gas specifications for intelligent utilization (around 20mmcfd is being targeted, with income estimated at PKR 1-1.5bn).

· SSGC AE will also purchase Biogas/ Biomethane (RNG) – BOO Model (animal or plant based) – 5 units to be purchased and added to the pipeline (cost of gas will be USD 7-7.5 and it will be sold for USD 9-9.5 per mmbtu).

· In addition, this company will make gas through coal.

· Whereas it will also undertake production & sale of renewable hydrogen – green fuel (can make it through water by electrifying it).

· Finally, power generation from waste – WHRS Method will be pursued (whereby you capture heat to produce and sell electricity; plans of adding 25MW to the grid).

· SSGC also has another subsidy: SSGC LPG (Pvt) Limited, which began imports of LPG in Feb’20. This has achieved a market share in the Terminal business of 65% (48% in FY22) and improved the LPG sale market from 2.5% in FY22 to 7% in FY23 (till Mar’23). Profitability from this business is also expected to be material for the company.

· The management also addressed the issue of revision in WACC due to increase in interest rates. SSGC has already claimed WACC of over 20-21% for FY24. Determination by OGRA is due, which can be expected by Jun’23.

Courtesy – AHL Research