PACRA Maintains Entity Ratings of Sui Southern Gas Company Limited
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 developments in the past 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. 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)in FY16. OGRA has given approval on both matters in favor of the Company. 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 stretched. SSGC has not issued its financial statements for FY18 & FY19; quarterly financials are also pending, however the management accounts reflect sustained profile, wherein some heads of accounts are in evolving position. The management is eyeing to take further extension from SECP on the same. The previous granted extension is expired in March 2019. Given SSGC's exclusive license to operate in its area of franchise (provinces of Sindh and Baluchistan) and guaranteed return is increased on its net operating assets in FY19 17.43% (FY18-17%), the business profile is considered good. The company's financial risk profile is stretched owing to (i) high leveraging - a factor of debt-driven CAPEX projects & sizeable payables, and (ii) deferred coverages - due to lower cashflows. The ratings take comfort from the fact that price risk would cushion the additional cashflows, SSGC’s strategic importance and association with the GoP. The management has represented that the matters pertaining to the financial statements would be resolved over the short horizon. The rating will be reviewed in light of them. SSGC is a part of Re-gassified Liquid Natural Gas (RLNG Phase I and II) project. 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 and consequent cashflows should support SSGC's diminished profitability.
The negative outlook captures the increase in debt level and unsettled matters pertaining to profitability. Also the delay in the publishing of financial statements is a consideration for rating watch.
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. Muhammad Wasim, Acting MD since Feb19, is supported by an experienced team.