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14 - 20 Apr , 2012
Saving The Sui Twins by SHABBIR H. KAZMI
Rising leakages and thefts are affecting profitability of gas distribution companies

While electric utilities have suffered the most due to massive theft, gas distribution companies were immune from this contentious sickness to a large extent. Now it is being felt that gas theft is having a toll on these companies. Therefore, if no corrective steps are taken immediately, the consumers already facing prolonged outages will also have to pay higher tariff. The added problem is that cash crunch is not Saving The Sui Twinsallowing these companies to revamp their transmission and distribution networks which further added to leakages and theft.
Even a cursory look at the financial statements of two gas distribution companies Sui Northern Gas Pipeline Limited (SNGPL) and Sui Southern Gas Company (SSGC) shows that they are a victim of Un-accounted For Gas (UFG). This comprises of leakages but mainly theft. Therefore, there is an urgent need to review the financial performance and take immediate remedial steps to save these enterprises going delinquent.
The profit of gas distribution companies is linked with net operating assets. Despite 17%YoY increase in these assets, gas distribution companies posted a decline of 4.7%YoY to Rs2.0 billion in profit after tax during 1HFY12. This was mainly because of increase in UFG and financial cost. While UFG grew by huge 15%YoY to Rs5.7 billion, financial cost of these companies grew by 29%YoY to Rs4.4 billion.
The Sui twins have been negotiating with the World Bank for a loan of US$250 million. Out of this SSGC will get US$200 million while SNGPL get US$50 million. The main purpose of this loan is to bring down the UFG losses which are currently above 10% against a benchmark of 7% fixed Oil and Gas Regulatory Authority (Ogra). With the release of this amount, it is expected that gas distribution companies will be able to reduce the leakage and theft of gas in their respective areas.
During 1HFY12, surprisingly, SNGPL was able to reduce its UFG losses by 6%YoY to Rs3.8 billion, whereas UFG losses of SSGC rose massively by 109%YoY to Rs1.9 billion. While the numbers may portray a different picture, the reality is contrary. UFG of SNGPL declined mainly because gas supply to certain segments remained suspended, the most notorious being CNG stations. As against this, hike in UFG of SSGC can be attributed to damage to its network caused by floods as well as blowing up of transmission lines.
It is on record that any upsurge in the financial cost hurts the bottomline of both of the gas distribution companies. Reportedly, their total borrowing from banks is as high as Rs37 billion. Out of this, Rs24.6 billion pertains to SSGC and SNGPL's share was Rs12.3 billion at the end December 2011. This shows that both the companies are forced to borrow more as internal cash generation has nbeen constrained Saving The Sui Twinsbecause of rising circular debt.
During 1HFY12, long term borrowing increased by 87%YoY to Rs22.7 billion as gas distribution companies had to borrow funds for their capital expenditure, while short term borrowing increased by 33%YoY to Rs14.4 billion. Currently, the average cost of borrowing of the two companies comes to around 13%.
The gas distribution companies are facing the main challenges of rising UFG losses due to increase in cost of gas along with upsurge in gas thefts. Moreover, escalating financial charges followed by rising funds and demands to fulfill capital expenditure needs is constraining expansion and revamping of transmission and distribution network of these companies.
A closer look at SSGC-KESC relationship reveals that KESC owes nearly Rs30 billion to SSGC. Despite various understandings reached between the two companies KESC continues to fail in honouring its commitments. KESC had agreed to pay outstanding amounts in installments as well as pay current bills. However, it could not honour its own words.
Ironically, KESC is trapped in a vicious circle and it looks almost impossible that it would ever be able to pay off SSGC. However, the situation can't be allowed to linger on because it is the question of saving the two key energy supplying companies to Karachi. It is true that despite being defaulter SSGC just can't stop supplying gas to KESC. However, some remedial steps have to be taken to improve cash flow of KESC.
According to the experts KESC suffers from poor cash flow and mounting receivables. Unless these two contentious problems are resolved the KESC will never be able to pay for fuel cost and electricity purchased from NTDC and IPPs.
The transmission and distribution (T&D) losses of KESC hover around 40%, which mainly comprise of theft. Electricity is being pilfered by groups enjoying support of political parties. Ironically, PPP, MQM and ANP, the three coalition partners have emerged to be the biggest protectors of the pilferers. Since no party is willing to allow removal of illegal connections, KESC management is completely helpless.
Despite fully cognizant of the fact that KESC and SSGC are two strategic partners in meeting energy requirements of Karachi, both the federal and provincial governments have not been able to find a sustainable solution. The government just can't keep on injecting funds into KESC and if SSGC does not get paid, it will soon turn delinquent.
This winter has witnessed the worst load-shedding of gas and the situation will be real precarious if no remedial steps are taken at the earliest. Let every one accept the fact that KESC's management despite hiring expensive top management has not been able to improve the financial condition of the company.
Now it has become the responsibility of the federal and provincial governments to stop transfer of financial sickness of KESC to SSGC and PSO. Some of the decisions may be difficult but have to be taken to save KESC, SSGC and PSO. The first step is removal of illegal connections. However, on top of the list should be big industrial and commercial consumers as well as government and semi-government offices. The number of domestic kundas may be large but they contribute only a small percentage of the overall theft. If these connections are regularised and the consumers convinced to pay the bills regularly, KESC's financial condition can be improved substantially.

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