SSGC to be severely impacted by unfavorable UFG benchmark and increased debt level: PACRA

January 1, 2019 (MLN): Pakistan Credit Rating Agency has maintained entity ratings of Sui Southern Gas Company at ‘A+’ for long-term and ‘A1’ for short-term, with a negative outlook forecast.

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 recent developments include the proposal of Economic Coordination Committee (ECC) to OGRA to allow gas utility to stagger the impact of remaining amount of Rs. 18 billion to five years (from FY16 and onwards), which is a relief. Previously, the company had accounted for half impact of Rs. 36 billion 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 has proposed 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.

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 ratings take comfort from SSGC’s strategic importance and association with the GoP.

SSGC is a part of Re-gasified 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 favorable 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 unfavorable resolution of UFG benchmark and increased debt level, which will have significant detrimental impact on the risk profile of the company.

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