November 9, 2020: Pakistan Credit Rating Agency (PACRA) has maintained entity ratings of Sui Northern Gas Pipeline Limited (SNGPL) at AA- for long-term and A1 for short-term, with a stable outlook forecast.

According to the rating agency, 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 unaccounted 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.

 PACRA

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