The Pakistan Credit Rating Agency Limited
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Muhammad Jhangeer Hanif

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PACRA Maintains Entity Ratings of Sui Southern Gas Company Limited; Rating Watch remains with negative outlook

Rating Type Entity
Action Maintain Downgrade
Long Term A+ A+
Short Term A1 A1
Outlook Negative Rating Watch(-ve)
Rating Watch - -

PACRA revised SSGC’s ratings from “AA-” to “A+” (Single A Plus), with a “Negative Outlook” in Jun 16. This was in recognition of significant pressure on the company’s financial profile, emanating from substantially high UFG disallowance and other matters pertaining to operating / non-operating income. Cognizant of this, SSGC had filed a petition in the Sindh High Court against OGRA, availing a stay order. In Nov16, petition was dismissed. Consequently, SSGC had to account for the earning impact of PKR 36bln at 4.5% UFG, which SSGC has decided to stagger equally between FY16 and FY17. This has dented the equity base of the company. The management has cushioned it through various means. Provisional allowance of certain claims regarding UFG volume in law affected areas and pilfered volume by non-consumer by OGRA has also provided some relief. To cater the challenge of UFG disallowance, the management is pursuing a multi-faceted approach i) sustained reduction in actual UFG ii) implementation of UFG benchmark study by OGRA, iii) favourable accounting of LNG in calculation of UFG. Timely execution of this is crucial to hold the ratings. Apart from this, timely settlement of receivables is also important. The declaration of benchmark UFG rate is awaited from OGRA, post finalisation impact of study by an independent consultant. SSGC has recently issued its overdue financial statements for FY16, however, the timeliness of financial statement is yet to fully regularize (quarterly financials of FY17 are delayed). Given SSGC's exclusive license to operate in its area of franchise (provinces of Sindh and Baluchistan) and guaranteed return on its net operating assets (17%), the business profile is considered strong. The company's financial risk profile is stretched owing to (i) high leveraging - a factor of debt-driven CAPEX projects, and (ii) inadequate coverages - due to lower cashflows.
SSGC is a part of Re-gassified Liquid Natural Gas (RLNG Phase I and II) project. Under the project, SSGC laid down the 338KMs pipeline at the cost of ~PKR 42bln with a capacity of 1.2bcfd to North; operational since Jan17. RLNG Phase III project is pending regulatory approvals. The loan raised to fund the projects carries a sovereign guarantee with repayments commencing in Jun18. Return on the resulting capitalised new assets as well as favourable decision of UFG benchmark rate should support SSGC's diminished profitability. Consequent cashflows should also provide some respite to financial risk profile in the medium term.
The negative outlook captures the downside arising from unfavourable resolution of UFG benchmark and increased debt level, which will have significant detrimental impact on the risk profile of the company.

About the Entity
SSGC is engaged in the business of purchase, transmission, and distribution of natural gas. The company is catering the requirements of ~2.8mln customers. The government holds the largest direct stake (~60%). The eleven -member board comprises NEDs. Mr. Amin Rajput, Acting MD since Jun16, is supported by an experienced team.

The primary function of PACRA is to evaluate the capacity and willingness of an entity to honor its obligations. Our ratings reflect an independent, professional and impartial assessment of the risks associated with a particular instrument or an entity. PACRA's comprehensive offerings include instrument and entity credit ratings, insurer financial strength ratings, fund ratings, asset manager ratings and real estate gradings. PACRA opinion is not a recommendation to purchase, sell or hold a security, in as much as it does not comment on the security's market price or suitability for a particular investor.