Gas price structure effect: SSGC continues to baffle at the stock exchange

Despite not announcing financial results for past two years, share price increases.


Saad Hasan December 29, 2014

KARACHI:


For a company that has not announced financial results for the past two years, shareholders of the Sui Southern Gas Company (SSGC) appear excited considering its share has rallied 42% since November 5 on active trading.


So far in the month of December, around 81.49 million shares have changed hands. The entire month of November saw trading in 60.8 million shares, bulk of it in the last seven trading sessions. This volume was just 9.4 million in October and 27 million in September.

This interest has its roots in the Economic Coordination Committee’s (ECC) decision on November 20 that allowed a vital change in the consumer gas pricing structure and consequently the revenue of the company.

The revenue and income of SSGC and its sister organisation Sui Northern Gas Pipelines Limited (SNGPL) is regulated by the Oil and Gas Regulatory Authority (Ogra) under a complex system.

At least twice a year, both companies submit detailed petitions listing the cash they would need in order to supply gas to countrywide consumers.

For instance, SSGC filed a petition in early 2014, demanding Rs108.19 per unit increase in its tariff to meet costs of delivering gas to people’s doorstep – which comes to around Rs538 per unit.

This cost of Rs538 is calculated after taking into account various expenses like the price at which SSGC buys gas from drilling firms, cost of transporting it through the vast pipeline infrastructure, depreciation and a guaranteed return of 17% on fixed assets.

But what it doesn’t include in the tariff is its other income of royalty payments received from Jamshoro Joint Venture Limited, meter manufacturing plants, late payment surcharges and sale of condensates.

For the current year, the other income is Rs7.2 billion. It basically means that this much of money should not be factored in while calculating the tariff.

That in turn means that factories, restaurants and households pay a higher price for gas while Rs7.2 billion goes to the shareholders.

Ogra has all along resisted this. And its decision on July 3 on SSGC’s petition went beyond that. It reprimanded the utility for sticking with its demand of seeking a higher tariff instead of bringing efficiencies and cutting cost.

“The authority further notes that the petitioner, in the instant petition, has not even bothered to explain its stance and simply excluded the above incomes from revenue requirement calculations,” Ogra said in the decision available on its website.

Against the regulator’s decision, the ECC sided with the gas utilities and allowed them to charge a higher tariff from consumers.

Stock analysts say that it’s too early to determine the impact of the decision on bottom-line of the companies in absence of published financial results. Ogra says that it has prepared a new tariff regime to address the issues but the two utilities are not interested in its implementation.

“The utilities’ only focus remained at getting financial benefit through presenting doomsday scenario of financial collapse,” it noted.

The regulator believes that the 17% to 17.5% guaranteed return on net fixed assets should be enough for the companies to record reasonable profit. Yet the revenue shortfall year after year reflects financial haemorrhage and wastages.

Billions of rupees of gas, which leaks out of the pipelines and gets stolen, also translates into a higher tariff for consumers who pay their bills.

Known as unaccounted for gas (UFG), this loss is 9% or over 200 million cubic feet per day of gas, which is sufficient to run a 600MW power plant throughout the year.

Ogra, on its part, allows only 4.5% UFG to be adjusted in the tariff. This means the utilities have to come up with other ways to make up for the revenue loss.

Despite waiting for over a month, Afzal Bajwa, Ogra’s media consultant, did not respond to questions. The regulator’s chairman also did not respond to repeated requests.

Published in The Express Tribune, December 30th,  2014.

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