Sui Southern Gas : Transmission of Quarterly Report for the Period Ended 31 December 2021

PERSEVERE

PROGRESS

PROSPER

Un-Audited Unconsolidated Condensed Interim Financial Statements for the half year ended December 31, 2021

CORPORATE PROFILE

BOARD OF DIRECTORS

AS ON DECEMBER 31, 2021

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DIRECTORS' REVIEW

For Six Months Period Ended December 31, 2021

We are pleased to share the Company's results for six months period ended December 31, 2021.

Financial Overview

The Company recorded Loss after Tax of Rs. 2,001 million after incorporating major disallowances by OGRA. 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 financial bottom-line of the Company.

In line with OGRA Determination on Final Revenue Requirement (DFRR) for FY 2020-21 issued on November 24, 2022, net disallowances absorbed in these six months' financial results amounted to Rs. 6,281 million against Return on Assets of Rs. 7,921 million. Finance cost for the period is Rs. 2,219 million.

As compared to the corresponding period of last year in which Loss after Tax of Rs. 1,668 million was reported, the financial position of period under review is affected due to reasons as under:

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 on RLNG Distribution business.

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

In past, OGRA had the practice to allow provision against impaired debts as operating expense related to disconnected customers only whereas, with adoption of IFRS-9, provisioning is required based on Expected Credit loss i. e. forward looking approach which also covers provisioning against Live Customers.

In DFRR FY 2020-21, OGRA has allowed Provision against Impaired Debts as operating expense computed on the basis of average of last five years allowed provision. Following the same principle, the provision disallowed for the period under review is computed at Rs. 208 million whereas disallowance in last year comparative period was Rs. 54 million.

High Financial Cost

SSGC has to account for financial charges of Rs. 2,219 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 Qassim to Sawan CTS delivering RLNG volumes to SNGPL network for meeting the energy requirements of North.

An amount of Rs. 910 million is expected to be allowed by OGRA as per past practice to compensate the Finance Cost of Short Term Borrowing incurred mainly due to significant delay in Tariff Notifications.

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, 2021 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 PSML has made payment of Rs. 307 million in FY 2021-22 which has been adjusted against current bills. PSML made this payment out of the allocations made by the Finance Division for the purpose. The claim of the Company including LPS against KE and PSML, as of December 31, 2021 is Rs. 141,196 million and Rs. 78,020 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 continuous basis and expect that this issue would be resolved as and when circular debt is addressed at national level.

Receivable from HCPCL

On April 30, 2018, the International Court of Arbitration issued Arbitration Award in favor of M/s Habibullah Coastal Power Company Private Limited (HCPCL) against HCPC claim of non-supply and short supply of gas by SSGC committed under the GSA. Consequently HCPCL adjusted its claim against running gas bills issued by the Company. Total exposure due to the above amounted to Rs. 8.0 billion.

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

Accordingly, LDs and LPS adjusted by HCPCL amounting to Rs. 3.8 billion and Rs. 0.3 billion allowed by arbitrator respectively 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 as an operating expense.

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 the 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. Board approved Strategy has been devised to control UFG and the same is under implementation.
4. Banks have waived debt to equity ratio requirements up to June 30, 2022. 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, 2021. 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 the 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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INDEPENDENT AUDITOR'S REPORT ON REVIEW OF UNCONSOLIDATED CONDENSED INTERIM FINANCIAL STATEMENTS TO THE MEMBERS

Introduction

We have reviewed the accompanying unconsolidated condensed interim statements of financial position of SUI SOUTHERN GAS COMPANY LIMITED ("the Company") as at December 31, 2021 and the related unconsolidated condensed interim statement of profit or loss, unconsolidated condensed interim statement of comprehensive income, unconsolidated condensed interim statement of cash flows, unconsolidated condensed interim statement of changes in equity and notes to the unconsolidated condensed interim financial statements for the half-year then ended (here-in-after referred as the "unconsolidated condensed interim financial statements"). Management is responsible for the preparation and presentation of this unconsolidated condensed interim financial statements in accordance with the accounting and reporting standards as applicable in Pakistan for interim financial reporting. Our responsibility is to express a conclusion on these unconsolidated condensed interim financial statements based on our review.

Scope of Review

We conducted our review in accordance with International Standard on Review Engagements 2410, "Review of Interim Financial Information Performed by the Independent Auditor of the Entity." A review of unconsolidated condensed interim financial statements consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Basis for Qualified Conclusion

1. As disclosed in notes 7.1 and 7.2 to the unconsolidated condensed interim financial statements, trade debts include receivables of Rs. 29,652 million and Rs. 24,865 million including overdue balances of Rs. 29,652 million and Rs. 24,786 million from K-Electric Limited (KE) and Pakistan Steel Mills Corporation (Private)

Limited (PSML), respectively which have been considered good by management and classified as current assets in the unconsolidated condensed interim financial statements. Further, KE and PSML have disputed

Late Payment Surcharge (LPS) on their respective balances due to which management has decided to recognize LPS on receipt basis from the aforesaid entities effective from July 01, 2012.

Due to the adverse operational and financial conditions of PSML, disputes by KE and PSML with the

Company on LPS, and large accumulation of their respective overdue amounts, we were unable to determine the extent to which the total amounts due from KE and PSML were likely to be recovered and the time span over which such recovery will be made;

1. As disclosed in note 8 to the unconsolidated condensed interim financial statements, interest accrued includes interest receivable of Rs. 10,394 million and Rs. 4,884 million from Sui Northern Gas Pipeline Limited (SNGPL) and Water and Power Development Authority (WAPDA), respectively.
2. These have been accounted for in line with Company's policy of charging LPS on overdue amounts, but have not been acknowledged by the counter-party. Due to dispute with WAPDA and SNGPL, and large accumulation of their respective overdue amounts of interest, we were unable to determine the extent to which the interest accrued amounts due from SNGPL and WAPDA are likely to be recovered and the timeframe over which such recovery will be made; and
3. On April 30, 2018, The International Court of Arbitration decided against the Company the case of Habibullah Coastal Power Company (Private) Limited (HCPCL) and imposed liquidated damages amounting to Rs. 4,158 million. Prior to the decision, the Economic Coordination Committee (ECC) through its meeting held on February 07, 2018 had proposed waiver of liquidated damages and directed Ministry of Energy - Petroleum Division to work out modalities in consultation with all stakeholders. Based on that decision, management has recognized a receivable of Rs. 4,158 million from HCPCL as disclosed in note 9.2 to the unconsolidated condensed interim
   financial statements. However, no agreement has been finalized to date between the relevant stakeholders. In the absence of the agreement, there is no contractual right to receive cash or financial asset from HCPCL and the requirements of IFRS 9 'Financial Instruments' are not met.

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Qualified Conclusion

Except for the adjustments, to the unconsolidated condensed interim financial statements due to matters described in (a), (b) and (c) above, based on our review, nothing has come to our attention that causes us to believe that the accompanying unconsolidated condensed interim financial statements as of and for the half year ended December 31, 2021 is not prepared, in all material respects, in accordance with the accounting and reporting standards as applicable in Pakistan for interim financial reporting.

Emphasis of Matter Paragraphs

We draw attention to the following matters:

1. note 1.3 to the unconsolidated condensed interim financial statements which states that in view of the financial position of the Company, the Government of Pakistan (Finance Division) has confirmed vide its letter dated July 6, 2020 to extend necessary financial support to the Company for the foreseeable future to maintain its going concern status. Thus, the sustainability of the future operations of the Company is supported through the said letter;
2. note 15.1 to the unconsolidated condensed interim financial statements which describes that the Company has not recognized the accrued markup up to December 31, 2021 amounting to Rs. 117,533 million relating to Government Controlled E&P Companies based on Government advise and a legal opinion; and
3. note 16 to the unconsolidated condensed interim financial statements which inter alia describe that the Company is subject to various material litigations and claims pending adjudication in different courts. The outcome of these cases is uncertain and beyond management's control;

Our conclusion is not modified in respect of above matters.

The engagement partner on the review resulting in this independent auditor's review report is Tariq Feroz Khan.

Chartered Accountants

Dated: May 20, 2023

Place: Karachi

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UNCONSOLIDATED CONDENSED INTERIM STATEMENT OF FINANCIAL POSITION

The annexed notes 1 to 30 form an integral part of these unconsolidated condensed interim financial statements.

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UNCONSOLIDATED CONDENSED INTERIM STATEMENT OF FINANCIAL POSITION

The annexed notes 1 to 30 form an integral part of these unconsolidated condensed interim financial statements.

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UNCONSOLIDATED CONDENSED INTERIM STATEMENT OF PROFIT OR LOSS

For the period ended December 31, 2021 (Un-Audited)

The annexed notes 1 to 30 form an integral part of these unconsolidated condensed interim financial statements.

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