Gas Price Hike to Help E&Ps and PSO Retire Previous Receivables Backlog
Staff Report:
OGRA has announced its decision on the review petition filed by Sui Companies regarding the revenue requirement for FY25. OGRA has recommended increasing gas prices by 8.8% for SNGP and 26% for SSGC, respectively. As part of the IMF program, adjusting gas tariffs is a structural benchmark, and the revised tariffs are due before February 15, 2025.
Average Operating Assets (AOA):
Sui companies’ profitability is determined by the return on average operating assets. Therefore, the rate of return and the quantum of average operating assets are crucial in the analysis. In its review petition dated October 28, 2024, SNGP requested an AOA of Rs147bn, compared to the previously approved AOA of Rs108.2bn from May 20, 2024. However, OGRA has allowed an AOA of Rs108.57bn, which is largely the same as the amount approved on May 20, 2024. The required return on assets is 25.92%.
50% of Finance Cost Allowed Now, Compared to 25% in the Previous Determination for FY25:
OGRA has now allowed 50% of the finance cost on running finance as pass-through, compared to the earlier approval of 25% in the May 20, 2024 review decision, against a request for 100% pass-through.
Independent Auditor’s Certificate:
OGRA has also instructed SNGP to submit a certificate from an independent auditor regarding the utilization of the running finance facility exclusively for payments to Pakistan State Oil (PSO) and Pakistan LNG Limited (PLL) to maintain smooth operations under the RLNG supply chain.
Unaccounted for Gas (UFG):
UFG for SNGP is estimated at 7.37% for both the distribution and transmission networks. The allowed UFG for FY25 is 6.3%, leading to the disallowance of 4,410 MMCF. Since one MMCF costs Rs1,377.87, this results in a disallowance of Rs6bn.
Estimated Earnings for FY25:
With average assets of Rs108bn and a required return on assets of 25.92%, the return on assets would be Rs37.8bn (including Rs9.7bn return on RLNG assets). After deducting the UFG disallowance and 50% of the finance cost, we expect SNGP’s earnings to be Rs17.3/share. If 100% of the finance cost on running finance of Rs150bn is allowed, earnings would increase to Rs28.2/share.
Gas Price for SNGP Network to Increase by an Average of 8.8%:
OGRA has recommended increasing the SNGP average price per mmbtu from Rs1,635.9 to Rs1,778.35. It is important to note that, based on the FY25 determination, the current price of Rs1,635.9 would be sufficient to cover any increase in cost or expense, resulting in a marginal surplus of Rs4-5bn. However, OGRA has added an additional Rs55bn in the determination to cover a small portion of the previous years’ total shortfall of Rs610bn. As a result of this addition of Rs50bn as part of the revenue requirement for SNGP, the prescribed price is recommended to increase by 8.8%.
In the Case of SSGC:
OGRA has incorporated Rs83bn from the previous shortfall of Rs642bn in the revenue requirement for FY25. The prescribed price for SSGC is recommended to increase by 26% to Rs1,762.51/mmbtu.
Increase/Status Quo in Gas Prices Positive for Sui Companies, E&Ps, and PSO:
Currently, gas tariffs are largely covering 100% of the costs, leading to improved cash flows for E&P companies and PSO. We believe that both maintaining the status quo or increasing gas prices will be positive for these companies, as cash flow recovery will be certain. The latter would even result in the clearance of previous backlogs. As a next step, the government is expected to revert with its decision within 40 days of this determination, Topline said in a report.
