SNGPL is the largest integrated gas company in the country, engaged in distribution and transmission of gas in the north of the country. Its transmission system extends from Sui in Balochistan to Peshawar in NWFP.

SNGPL was incorporated as a private limited company in 1963. Later in 1964, it converted into a public limited company. It is listed on all the three stock exchanges of the country.

The company is mainly responsible for the operation and maintenance of high-pressure gas transmission and distribution systems. The SNGPL serves the north central part of Pakistan. The company's distribution system comprises of 46,964 km of pipeline, spreading over 831 main towns and adjoining villages. The graph illustrates the growth in its transmission system.

Moreover, the SNGPL has now expanded its operations to venture into the business of planning, designing and construction of pipelines, both for itself and for other organisations.

The main fields supplying gas to SNGPL are Dhodak, Gurguri, Chanda, Pirkoh+Loti, Sui, Zamzama, Qadirpur, Sawan, Block 22 and the Northern sources. SNGPL, along with the only other gas utility in the country, operates under a fixed return formula whereby the profitability of the companies at the EBIT level is linked to their net operating assets. For SNGPL, their EBIT is guaranteed at 17.5% of average operating assets. Thus the higher the investment in infrastructure and assets, the higher the rate of return. This acts to encourage companies to invest more in order to increase their earnings.

During FY06, the completion of SNGPL's projects for the supply of gas to Murree, Kot Radha Kishan, Lilla town and many other areas was realised. As a result of these developments, the company's gas distribution network extended over 831 different towns in the country and the total network length stood at 46,964 kms at the end of FY06. FY06 concluded with the plans to supply the gas to various southern districts of NWFP and Punjab. During FY07, the company installed a record number of industrial, commercial and domestic connections, bringing the total number of customers up to 2,953,818. The company laid 430 kms of transmission pipelines and 5,430 kms of various diameters of distribution mains. This led to an extension in transmission network capacity at Lahore, Faisalabad and Haripur sections. Consequently, 145 villages and 37 district headquarters and tehsil headquarters have been added to the network. As a result, the transmission system of the company has been extended to 6,625 km, whereas the distribution network extends to 52,394 km.

Currently, the SNGPL is involved in the construction activities of Project-9. This project will eliminate bottlenecks in the existing transmission network, through system upgradation with loop lines and addition of compression facilities. The Project-9 includes laying of 573 kms of transmission pipelines ranging from 12" diameter to 36" diameter. The estimated total cost of Project-9 is $200 million. This project will further add to the asset base of the company and thus increase the fixed returns.

At the same time, the management has also enhanced its focus on customer service, for all categories of customers. Besides this, it has also launched a media campaign to create awareness among the consumers and public for controlling high gas bills by conserving the limited and depleting resource of natural gas.

RECENT RESULTS:

The first half of FY08 witnessed an improvement in profits of SNGP, as Profit after Tax grew 20% to Rs 1.43 billion, compared to Rs 1.19 billion in HY07, due to higher sales and a decline in UFG provisions. The company posted an 8% growth in terms of sales volume, with a resulting increase in net sales of 8.4% in HY07. The company also recorded higher capex of Rs 8.3 billion during the HY08. The resulting increase in operating assets and operating income, in addition to the sales growth and lower UFG provisions allowed the company to achieve a growth in formula income of 44%. The company has targeted an ambitious UFG provision of 5.32% for FY08. The provision stood at 7.76% for FY07. Operating income grew 17.2% during the six-month period, with a corresponding rise in operating profit of 43%. The gross and net profit margins have also shown slight improvement over the period.

Other income, however, has suffered a setback during the period, as higher capex restricted the company's cash holdings to Rs 15 billion and other income fell by 20%. At the same time, financial charges have also declined significantly, to Rs 435 million in HY08, compared to Rs 565 million in HY07, an improvement of 23% during the six months. These developments have translated into a bottom line growth of 20% in HY08, from HY07.

The graph compares the stock of SNGPL with the KSE 100 Index. It can be observed that the company's performance has been better than the overall performance of KSE 100 Index. The company's stock performance has been relatively consistent over the six-month period, withstanding the huge fluctuations in the Index.

FY07 witnessed a decline in profitability of gas distribution companies of 35.7%. This can be attributed to the problem of Unaccounted for Gas (UFG) and uniform pricing system by OGRA.

During FY07, SNGPL posted a 6.35% growth in sales revenue. FY06 saw an increase in sales revenue by 26.95% over the previous year as sales volume increased by 6.4%. The company also added more clients to their customer base during the year. SNGPL has been performing better than SSGC in terms of increasing its market and customer base. The fact that SNGPL has a larger franchise base with more major urban areas also plays to SNGPL's advantage.

During FY07, profits suffered a setback of 28%, despite the increase in company sales. The uniform pricing system of OGRA and a rise in UFG are responsible for this outcome. In spite of efforts made by the company, UFG remains a major issue for the company, exceeding the target prescribed by OGRA by 2.07% in FY07. Even though SNGPL is entitled to a 17.5% return on its average net operating assets (excluding assets financed through government grants and customers contributions) but certain adjustments are made to the guaranteed return by Oil and Gas Regulatory Authority (OGRA).

In FY07, the high level of UFG and certain other expenses resulted in a reduction of Rs 2,504 million from the total return of 17.5% by Rs 2,504 million. The management is actively working on various simultaneous strategies to reduce UFG losses. Certain disallowances made by the Regulator also contributed to the profitability trend. These events hit the profit margins of the company, resulting in a slashing of gross margin but had a less severe impact on net profit margin.

The FY06 saw an increase in profitability despite a decline in the gross profit margin due to rising cost of gas. The increase, however, was largely a result of an increase in other income and tax adjustments than operating efficiency.

The SNGPL has been more profitable than its counterpart for all five years under scrutiny. During FY07, the company posted a profit higher than the other player in the industry, and maintained its superior position in terms of profit margins.

In terms of ROE and ROA, again, SNGPL has fared better than the other industry player. The liquidity position improved in FY06. An increase in inventory, cash and tax refunds led to this progress even as current liabilities increased. The company managed to maintain its liquidity at the same level of previous year. The major contribution to current assets comes from inventory, trade debts, other receivables and cash. This combination of assets, except cash, matches the current asset portfolio of the other company in the business. However, the company has built up a large balance in cash and bank, compared to its counterpart. This represents idle and unproductive assets, which may be better invested elsewhere.

Nevertheless, the SNGPL managed to retain its superior standing relative to its competitor.

Being a gas distribution company, the inventory turnover (days) is short. The inventory turnover dropped even lower during FY07, reflecting more efficiency in asset management. However, the longer collection period results in a considerably long operating cycle. The company's efforts for more efficient recovery of receivables led to a decline in the DSO for FY06 and FY07, bringing it below the industry average from a previously higher standpoint. The operating cycle of SNGPL is shorter than that of its counterpart in the south. Even though the high level of trade debts and consequently the high DSO is a common characteristic of both companies in this business, but the company should continue to work towards further lowering its collection period in order to reduce uncertainty and risk associated with it.

The total asset turnover and sales to equity graphs sloped upwards in FY06 and FY07, as sales revenue increased by nearly 27% and 6.35% respectively for the periods, against a smaller increase in assets and the equity.

SNGPL is the less leveraged firm in the sector. This indicated the lower debt ratios of the company. The FY07 and FY06 ended with the same trend. As the long term means of financing mature and the company pays out its outstanding loans, the interest payments due also decline. Consequently, despite the lower operating profit in FY07, the company's TIE has gone up. Hence the interest risk of the company has declined considerably. Moreover, the SNGPL is more effective in terms of interest coverage.

The company issued bonus shares during FY07, bringing up the share capital of the company. At the same time, deferred credit has also risen, so that on the whole the gearing of the company has increased for the year.

FY07 witnessed a break in the positive trend of EPS, as earnings declined 28%, pulling EPS down to Rs 4.88. This, again, was a result of the uniform pricing system of OGRA and UFG, combined with the increase in shares from bonus issue. The company's performance is still better than its counterpart.

Despite the decline in profitability, the company declared a dividend of Rs 3 per share. As a result, the dividend payout in FY07, was the highest in the company's history. The DPS is also substantially higher than that paid by the other company in the sector. The DPS in FY06 also stood at Rs 3 per share. The company also announced a 10% bonus issue during the year in addition to the DPS of Rs 3. The trend of increasing book value was broken in FY07 as the company issued bonus shares, pulling down the trend line.

The graph shows the stock trend for SNGPL over the last year, comparing to the KSE 100 index. The company performed well during the first half of 2007, staying above the KSE 100 Index, but falling below the Index after August.

FUTURE OUTLOOK:

During the six months period to December 31, 2007 the SNGPL completed 290.38 km of transmission lines. The natural gas facility is now being extended to Hangu, Lakki Marwat, Karak and Tank in southern NWFP and to Burewala, Arifwala, Mailsi, Vehari, Dunyapur, Kahror Pacca and Dijkot Tandlianwala in Punjab. Moreover, the industrial units and power plants in Sheikhupura have also been provided gas facility.

SNGPL operating assets increased to Rs 44.5 billion in Dec-07 and shall cross Rs 48 billion mark by Jun-08. Relative to the considerable network expansions and upgradations over the period, the growth in sales volume has grown slowly. Even though a part of the capex can be attributed to maintenance expenditure, but at the same time, a large part of network expansions have been undertaken in less populated areas, funded through deferred credit. Supply constraints have limited growth in sales volume. In addition, higher operating assets will lead to greater prescribed prices/mmcft to retain the utility's returns at 17.5%.

While the UFG provisions have been reduced during the first half of FY08, but in light of FY07 provision of 7.76%, it is expected that the company will increase the provisions during the second half of the year. Moreover, since the HY08 provisions have been lower than the targeted provision of 5.32% for the year so the company might increase provisions during the second half in order to meet its target. Lastly, the expansions in less populated and tougher terrains, increased incidents of spillovers, making it more difficult to contain and reduce UFGs.

The company is also planning to complete the 573 km lines by June 2009, whereas 84 km out of 140km have already been completed under Advance Action Plan of Project IX. The project aims at the injection of more gas in the SNGPL transmission system, from sources in the north to augment the existing system upstream to Lahore. This will reduce the supply constraints faced by the company, placing it in a better position to meet growing demand of gas. Hence it is expected that completion of this project will bring up an improvement in sales growth of the company.