Sui Southern Gas : Transmission of Quarterly Report for the Period Ended 31 December 2020

CORPORATE PROFILE

BOARD OF DIRECTORS

AS ON DECEMBER 31, 2020

BOARD OF DIRECTORS' COMMITTEES

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DIRECTORS' REVIEW

For Six Months Period Ended December 31, 2020

We are pleased to share the Company's results for six months period ended December 31, 2020.

The Company continued to face serious challenges, however, financial results have been improved significantly due to various actions taken by the Management under the guidance of the Board of Directors.

Financial Overview

The Company recorded net after tax loss of Rs. 1,668 million after incorporating major disallowances by OGRA. This Loss is 88% less than the comparative period loss of six months ended 31 December 2019.

The summary of financial highlights of the period is given below:

SSGC Profitability is derived from the Guaranteed Return Formula prescribed by OGRA. Under this formula, SSGC is allowed 17.43% return on its average net operating fixed assets before financial charges and taxes. However, OGRA makes disallowances/ adjustments while determining the revenue requirements based on efficiency related benchmarks viz a viz Un-accounted for Gas (UFG), Human Resource Benchmark Cost, Provision for Doubtful Debts and some other expenses/ charges. These disallowances/ adjustments affect the bottom-line of the Company.

As compared to the corresponding period of last year in which Loss After Tax of Rs. 13,482 million was reported, there is significant improvement in bottom line of current period and reported Loss After Tax is Rs. 1,668 million which is an improvement of 88% in Bottom-line. Improvement in bottom line is attributed to completion of absorption of staggered losses in June 2020 to the extent of Rs. 3,672 million and Rs. 8,142 million reflects operational efficiency mainly due to reasons as under:

In line with OGRA Determination on Final Revenue Requirement (DFRR) for FY 2019-20 issued on March 28, 2022, total disallowances absorbed / credits allowed in these six months financial results amounted to Rs. 5,828 million against Return on Assets of Rs. 7,831 million. Finance cost for the period is Rs. 2,474 million.

Acceptance of UFG Allowance on RLNG Business

SSGC has been pursuing vigorously OGRA through the Ministry of Energy (Petroleum Division) as well as through Islamabad High Court to allow Actual UFG on RLNG business in Distribution Network. As a result of IHC restraining Order, OGRA has allowed Actual UFG of 17.25% based on FRR of 2019-20.

However, still high UFG disallowance is mainly due to the fact that OGRA is not accepting RLNG Volume Handling benefit allowed to SSGC vide a Summary approved by the Economic Coordination Committee (ECC) dated May 11, 2018. With vigorous follow-up of SSGC Management & Board of Directors, OGRA has engaged a Consultant to determine the extent of UFG on RLNG and its impact on each Sui Company, namely SSGC and SNGPL.

Provision against impaired debts

OGRA allows provision against impaired debts as operating expense related to disconnected customers only. However, on adoption of IFRS-9, provision is being made on Expected Credit loss basis i. e. forward looking approach which also requires provisioning against Live Customers, resultantly, bottom-line of the Company was badly affected in previous periods. In current period, after rigorous efforts, the Company has improved the bottom-line by restricting the Provision against Impaired Debts of live customers amounting to Rs. 54 million has been treated as not allowable expense by OGRA.

High Financial Cost

SSGC has to account for financial charges of Rs. 2,474 million against borrowing which is mainly due to the Long-Term Loan obtained to finance its Pipeline Infrastructure for transmission of RLNG from Karachi Port to Sawan delivering the RLNG volumes to SNGPL network for meeting the energy requirements of North.

An amount of Rs. 659 million has been allowed as Finance Cost on Short Term Borrowings with direct positive impact on bottom line.

Modification in External Auditor's Review Report

There is no new Qualification in the External Auditors' Review Report. However, the External Auditors, M/s. BDO Ebrahim & Co., Chartered Accountants continued with similar qualifications in their review report for the six months period ended December 31, 2020 for the amounts due from KE and PSML, late payment surcharge (LPS) receivable from SNGPL and WAPDA and Receivable from Habibullah Coastal Power Company (Private) Limited (HCPCL).

Receivables from KE and PSML

Receivable dispute situation of K-Electric (KE) and Pakistan Steel Mills Limited (PSML) remained the same as in previous years. The Management is vigorously pursuing recovery suit filed against KE. At the same time, the management is in constant liaison

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with the concerned ministries to expedite the recovery of outstanding dues from KE and PSML. It is expected that as soon as the matter is permanently resolved by the Government of Pakistan, the overall financial position of the Company will improve. It is pertinent to mention that, subsequent to period ended December 2020, PSML has made payments of Rs. 849 million against monthly gas bills from July 2020 to May 2021, out of the allocations made by the Finance Division for the purpose. The claim of the Company against KE and PSML, as of December 31, 2020 is Rs. 121,899 million and Rs. 71,229 million, respectively.

LPS Receivable from SNGPL and WAPDA

The Company is facing the situation of accumulated receivable from SNGPL and WAPDA due to overall circular debt situation. However, based on the agreed terms and conditions, the Company is accruing LPS against overdue amount. The company is apprising this position to the concerned Government Authorities on daily basis and expect that this issue would be resolved as and when circular debt is addressed at national level.

Receivable from HCPCL

M/s Habibullah Coastal Power Company Private Limited (HCPCL) filed its request for Arbitration under the Rules of the International Chamber of Commerce, Singapore on November 30, 2015 disputing non-supply and short-supply of gas by SSGC committed under the GSA.

On April 30, 2018, the decision of the arbitration proceedings has been issued by the International Court of Arbitration in favor of HCPCL. Consequently HCPCL adjusted its claim against running gas bills issued by the Company. Total exposure against the above amounts to Rs. 8.0 billion.

However, liquidated damages of Rs. 3.8 billion claimed by HCPCL from the Company was a consequence of Liquidated damages charged to HCPCL by WAPDA/CPPA-G, i.e., flow of payment from one GOP entity to another GOP entity. Therefore, ECC in its meeting held on February 07, 2018 approved in principle the proposal regarding waiver of liquidated damages with the direction to Petroleum Division & Power Division to work out modalities in consultation with all the stakeholders by treating period of no dispatch as "Other Force Majeure Event (OME)" and thus extending the period of GSA with no dispatch period.

GSA between SSGC and HCPCL has expired in September, 2019 whereas Power Purchase Agreement (PPA) between HCPCL and CPPA-G is valid till 2029.

Accordingly, LDs adjusted by HCPCL amounting to Rs. 3.8 billion and excess LPS adjustment allowed by arbitrator of Rs. 0.3 billion is "Recoverable from HCPCL" and remaining amount of Rs. 3.9 billion pertaining to Reversal of LPS receivable, Interest on LD Charges and Legal expenses was allowed by OGRA in its Decision on Final Revenue Requirement (DFRR) for FY 2018-19 dated May 25, 2021.

Emphasis of matter

Based on Financial Performance discussed in Note 1.3 of Financial Statements, Auditors have concluded that material uncertainty exists that may cast significant doubt on the Company's ability to continue as going concern. However, the Company has obtained a support letter from Government of Pakistan, Finance Division dated July 06, 2020 that commits support to maintain the going concern status of the Company. The Auditors have emphasized it in its review report as "Emphasis of Matter".

To evaluate the financial resilience of the Company, the following major factors are relevant:

1. UFG allowance based on RLNG handling on volumetric basis would be sought from OGRA as already elaborated in preceding paragraph.
2. Government of Pakistan (Finance Division) (GoP) in its letter dated July 06, 2020, being majority shareholder has acknowledged the funding requirements of the Company and has shown commitment to extend all support to maintain the going concern status of the Company.
3. The management has devised a UFG control strategy to control UFG in coming years and the same is under implementation with the approval of Board of Directors.
4. New Tariff Regime would provide guaranteed return on operating assets at 17.43% effective from FY 2018-19.
5. Banks have waived debt to equity ratio requirements. Further, the Company has never defaulted in payment of any installment and interest thereon and some of the loans have been totally paid off to date.

In addition to the above the External Auditors, M/s. BDO Ebrahim & Co., Chartered Accountants have drawn attention on certain issues in their review report for six months period ended December 31, 2020. Comments on these matters are as under:

1. SSGC has discontinued recognition of LPS expenses payable to the Government controlled E&P companies (OGDCL, PPL & GHPL) effective from July 01, 2012 till the time SSGC receives LPS income from PSML and KE; and
2. Litigation and other matters mentioned in Contingencies and Commitment are being pursued aggressively for favorable resolution.

Acknowledgements

The Board wish to express their appreciation for the continued support received from the shareholders and its valued customers. The Board also acknowledges the dedication of all the employees who soldiered on, despite number of challenges confronting the Company. The Board also thanks the Government of Pakistan, the Ministry of Energy and the Oil and Gas Regulatory Authority, for their continued guidance and support.

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