The Pakistan Credit Rating Agency Limited
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Sehar Fatima

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PACRA Maintains Negative Outlook on Entity Ratings of Sui Southern Gas Company Limited

Rating Type Entity
Action Maintain Maintain
Long Term A+ A+
Short Term A1 A1
Outlook Negative Negative
Rating Watch Yes Yes

The ratings reflect significant pressure on the company’s financial profile, emanating from substantially high UFG disallowance and other matters pertaining to operating / non-operating income. The management has cushioned it through various means. The recent developments include the proposal of Economic Coordination Committee (ECC) to OGRA to allow gas utility to stagger the impact of remaining amount of PKR 18bln to five years (from FY16 and onwards), which is a relief. Previously, the company had accounted for half impact of PKR 36bln at 4.5% UFG when Sindh High Court dismissed its plea against OGRA which resulted in gas utility booking a loss for year FY17. Furthermore, ECC proposes OGRA to finalize/adjust the provisional UFG benchmarks set from FYs 2012-13 to 2016-17 in next determinations of revenue requirements of Sui companies in line with the recommendations of benchmark rate in UFG study (fixed benchmark of 5% UFG plus 2.6% for local conditions). However, approval from OGRA is still pending on these both. Timely execution and expected positive financial impact of these is crucial to hold the ratings. High UFG disallowance remains a challenge for the company. Apart from this, timely settlement of pending receivables is also important as the company’s liquidity profile is significantly streched. SSGC has not issued its financial statements for FY17, quarterly financials are also pending. However, the BoD is planned in January, 2019 for the approval of June 2017 financial statements. 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. The ratings take comfort from SSGC’s strategic importance and association with the GoP.
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.