The Pakistan Credit Rating Agency Limited
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Anam Waqas Ghayour

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PACRA Maintains Entity Ratings of Sui Northern Gas Pipelines Limited

Rating Type Entity
(06-Nov-20 )
(28-Dec-19 )
Action Maintain Maintain
Long Term AA- AA-
Short Term A1 A1
Outlook Stable Stable
Rating Watch - Yes

SNGPL's enjoys high ratings due to its strategic importance as country's largest gas utility company. The business profile of the company draws strength from its established franchise network, and guaranteed return on its net operating assets. In last few years, the company has witnessed improvement in its profitability due to ROA on RLNG infrastructure and on account of substantial reduction in UFG losses however during FY19; SNGPL witnessed increase in UFG disallowance amount which resulted in reduction in the growth in profit margins. Increased mark up rates also contributed adversely in the growth of profits from prior years. SNGPL is part of Re-gasified Liquid Natural Gas (RLNG) supply chain – which constitutes ~74% of gross sales in FY19, related ROA on which also contributed in profitability of the company over the years . It is notable that operating profit witnessed significant improvement and the finance cost diluted the net profits. With decline in interest rates profitability is expected to take positive impact going forward. The company has pursued a multi-dimensional framework to sustainably reduce the absolute quantum of un accounted for gas and percentage proportion. Consequent to UFG study conducted by OGRA and revision of UFG benchmark calculation, the effective UFG benchmark for the company was 6.92% for FY19; yet the company’s delta (actual vs. allowed) followed the increasing trend over the period. Further, the company, being part of circular debt, has significant receivables and payables on its balance sheet. Though working capital cycle is being managed through augmented short term borrowings which might create liquidity challenge for the company in future. It is also pertinent to mention that as per half yearly auditor's review report for FY 20, the modified audit opinion on Financial Statements FY-2019 has been unmodified in half yearly statements FY20. Projects were largely debt financed. OGRA has allowed guaranteed return on LNG pipeline infrastructure. Hence, incremental cashflows are supplementing SNGPL’s financial risk profile. Going forward, accumulating figures relating to differential margins / tariff adjustments, settlement of inter-corporate claims & circular debt issues will remain critical.
Meanwhile, ratings continue to draw comfort from sovereign ownership of the company. Ratings are dependent on the management's ability to prudently manage its financial risk profile, particularly post attainment of significantly increased credit lines to support working capital cycle.

About the Entity
SNGPL, the largest gas transmission & distribution company in Pakistan, is engaged in the business of purchase, transmission, and distribution of natural gas. The Government of Pakistan has direct shareholding of ~32% in the company. The eleven member Board comprises one ED and ten NEDs including five independent directors. Mr. Amer Tufail replaced Mr. Mahmood Zia Ahmad for the position of CEO/MD acting since October 2019. He is accompanied by an experienced team. On 20th November 2019, Mrs. Roohi Raees Khan, Director of SNGPL has been appointed as Chairperson of the Board in place of Late Mr. Syed Dilawar Abbas. She holds experience of more than a decade and represented on boards of various companies.

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.