SNGPL

CROSBY S E C U R I T I E S

GAS GA S DI ST RIBUT I O N

O C T O B E R 23, 2 0 0 9

I NI T I AT I NG CO V ER AG E Sui Northern Gas Pipelines Limited

Madeeha Akhtar KATS Code Reuters Code Curren Cu rrentt Price P KR Target Price PKR Upside Potential Shares Outsta Outs tand nding ing mn mn Pai d Up Cap Capita ita l PKR mn Market Capitalization PKR mn Free Float

SNGP SUIN.KA 27.29 36.34 33.00% 549.11 5,491.10 14,985.21 15.00%

Profitability Analysis SNGPL has posted a net Profit After Tax (PAT) of PKR 931mn for FY09 (EPS: PKR 1.69) as compared to PAT of PKR 2,497mn (EPS: PKR 4.55) over the corresponding period last year registering a significant decline of 60%. Unaccounted For Gas (UFG) and huge exchange losses led to this dismal performance . In FY10, we expect the profitability to improve considerably because of the drop in Weighted Average Cost Of Gas (WACOG) over the first half of the year. UFG Losses … A Drain on Earnings Adjustments are made to the t he guaranteed return by the OGRA on account of UFG losses in excess of the allowed targets. In FY09, the t he benefit of higher sales and an increase in asset base was dented by excessive UFG losses which amounted to PKR 6,283mn. The hit on account of the UFG losses was exacerbated by the enormous hike in WACOG. Higher UFG losses together with stringent OGRA targets have undermined the bottom line for FY09. In our future estimates, we assume that UFG losses will display a gradually declining trend.

SNG PL - Relative Price Performance Performance PKR /Share SNGPL

Valuation We initiate coverage on SNGPL with a BUY recommendation and a target price of PKR 36.34 per share, reflecting an upside potential of 33%. The stock is trading at a PE multiple of 6x for FY10F. SNGPL has underperformed the benchmark index, yielding a return of 27% as compared to the KSE-100’s healthy return of 66%YTD.

KSE-100

40

Exchange Losses Exchange losses on gas purchases increased by an exorbitant amount in FY09. However, going forward the rupee is expected to remain relatively stable against the USD. Hence, exchange losses are expected to fall sharply in FY10.

35

30

25

20

15     9     0      n    a     J

    9     0       b    e     F

    9     0      r    a     M

    9     0      r    p     A

    9     0      y    a     M

    9     0      n    u     J

    9     0       l    u     J

    9     0      g    u     A

    9     0      p    e     S

    9     0       t    c     O

Liquidity Concerns … Def erred Credit Credit & Circular Debt Deb t Other income declined by 16% to PKR 1,210mn in FY09. This is due to drop in interest income on large cash deposits as a result of a change in the deferred credit mechanism. This together with the circular debt issue has adversely impacted the liquidity position of the company. Wellhead Gas Prices A rise in the wellhead gas prices increases WACOG and adds on to the losses on account of UFG, as was the case in FY09. Going forward, the reduction in wellhead prices is expected to clip the cost of UFG losses for SNGPL and will improve profitability. Expansion Plans Expansion Pl ans OGRA has restricted the addition of fixed assets to PKR 11.4bn in FY10 as against the requested amount of PKR 18.5bn. This is quite low as compared to the record addition of over PKR 22bn that the company made to its operating fixed assets in FY09. Future Outlook It is expected that the benefit of the reduction in WACOG translating into lower UFG cost will be dampened by lower levels of other income, liquidity shortage (as a result of a change in the deferred credit mechanism) and lower asset additions approved by OGRA.

Disclaimer : All reports and recommendations have been prepared for your information only. Summary and Analysis are not recommendation to Buy or Sell. This information should only be used by investors Disclaimer: who are aware of the risk inherent in securities trading. The facts, information, data, indicators and charts presented have been obtained from sources believed to be reliable, but their accuracy and completeness cannot be guaranteed. Crosby Securities Pakistan Pvt. Limited and its employees are not responsible for any loss arising from use of these reports and recommendations.

CROSBY

GAS DI STRIBUT IO N

OCTO BER 23, 2009

Sui Northern Gas Pipelines Limited - Initiating Coverage

Table of Contents

SNGPL - Investment Perspective Valuation Risks to Valuation

……………………………………… ………………………………………

3 3

SNGPL - Comprehensive Analysis Profitability Analysis UFG Losses… A Drain on Earnings Exchange Losses Liquidity Concerns… Deferred Credit & Circular Debt Wellhead Gas Prices Expansion Plans Future Outlook Company Background

……………………………………… ……………………………………… ……………………………………… ……………………………………… ……………………………………… ……………………………………… ……………………………………… ………………………………………

4 5 5 5 6 6 7 8

Sector Overview Natural Gas... Leading the Way Mismatch… Growing Demand & Lagging Supply Demand Supply Plan for FY10 Help on the Way… Natural Gas Sourcing Plans Will the Benefit Trickle? Gas Distribution… The Key Players Tariff Regime… The Safety Net Required Return Calculation

……………………………………… ……………………………………… ……………………………………… ……………………………………… ……………………………………… ……………………………………… ……………………………………… ………………………………………

9 9 11 11 11 12 12 13

Key Financials of S NGPL

………………………………………

14

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CROSBY

GAS DI STRIBUT IO N

OCTO BER 23, 2009

Sui Northern Gas Pipelines Limited - Initiating Coverage

SNGPL - Investment Perspective Valuation ... We initiate coverage on SNGPL with a BUY recommendation and a target price of PKR 36.34 per share, reflecting an upside potential of 33% ...

We initiate coverage on SNGPL with a BUY recommendation and a target price of PKR 36.34 per share, reflecting an upside potential of 33%. The stock is trading at a PE multiple of 6.0x for FY10F. SNGPL has underperformed the benchmark index, yielding a return of 27% as compared to the KSE-100’s healthy return of 66%YTD. Our valuation is based on an average of the target prices, calculated using P/BV and Dividend Discount valuation models, the key components of which are summarized below. P/BV Valuation Growth Rate Risk Free Rate Risk Premium Beta Required Return Sustainable ROE P/BV Target Price/share

6.58% 12.0% 6.0% 0.67 16.02% 16.46% 1.05 PKR 35.70

Dividend Discount Model Growth Rate 6.58% Required Return 18.0% Payout Ratio 60.0% Target Price/share PKR 36.98

Risks to Valuation UFG losses ... Key risks to our valuation include inability to curtail UFG losses, higher financial charges and exchange rate risk ...

UFG losses account for the major chunk of the drop in the company’s earnings below the required return. High pressure in the pipelines, geographically tough terrains, varying tribal cultures, unfavorable political conditions and the law and order situation continue to pose major challenges. Financial charges SNGPL may encounter liquidity shortage as a result of a drop in the interest income on deferred credit. This would lead to greater dependence on short term borrowing and eventually disrupt profitability in the form of higher financial charges. Exchange rate risk Accelerated depreciation of the PKR can cause the company to register exchange losses on account of gas purchases as in FY09.

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CROSBY

GAS DI STRIBUT IO N

OCTO BER 23, 2009

Sui Northern Gas Pipelines Limited - Initiating Coverage

SNGPL - Comprehensive Analysis SNGPL enjoys a monopoly position in North Central Pakistan serving approximately 3.5mn customers. The company is structured to earn a guaranteed rate of return of 17.5%, which provides an inbuilt safety cushion. Both these factors work together to reduce its business risk. Its profile is further enhanced by its strong, low-leveraged balance sheet. However, controlling UFG losses is essential to keep its profitability afloat. Profitability Analysis SNGPL has posted a net Profit After Tax (PAT) of PKR 931mn for FY09 (EPS: PKR 1.69) as compared to PAT of PKR 2,497mn (EPS: PKR 4.55) over the corresponding period last year registering a significant decline of 60%. The company has posted a Loss After Tax (LAT) in the 4QFY09 of PKR 45mn (4QFY09 LPS: PKR 0.08) against a 4QFY08 PAT of PKR 733mn (4QFY08 EPS: PKR 1.33) and has not declared any final cash dividend for FY09. In FY09, the company’s sales revenue increased by 36% to PKR 168,934mn against PKR 124,155mn in FY08. This was on the back of an increase in consumer gas prices which offset the impact of the drop in volumes. The company made a record addition of over PKR 22 billion to its operating fixed assets but the benefit was masked by excessive UFG losses. The finance costs however, eased by 17% to PKR 653mn in FY09 due to lower levels of long term financing. ... In FY10, we expect the profitability to improve considerably because of the drop in WACOG over the first half of the year ...

In FY10, we expect the profitability to improve considerably because of the drop in Weighted Average Cost Of Gas (WACOG) over the first half of the year. Also we envisage operating expenses to go down to almost half of their FY09 amounts because of the anticipated decline in exchange losses. Profit After Tax - PKRmn

Source: Company financials & CSPL Research 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 FY04

FY05

FY06

FY07

FY08

FY09

FY10F

FY11F

FY12F

EPS and Dividend Payout EPS PKR (LHS) Dividend Payout % (RHS) Source: Company financials & CSPL Research 8.00

90%

7.00

80% 70%

6.00

60% 5.00 50% 4.00 40% 3.00 30% 2.00

20%

1.00

10%

0.00

0% FY04

... Healthy dividend payout in the range of 40%70% in the past ...

FY05

FY06

FY07

FY08

FY09

FY10F

With respect to investor returns from the scrip in terms of dividend, it may be noted that SNGPL has maintained a dividend payout in the range of 40%-70% over the past seven years, except for FY09.

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GAS DI STRIBUTI ON

OCTO BER 23, 2009

Sui Northern Gas Pipelines Limited - Initiating Coverage UFG Losses ... A Drain on Earnings Adjustments are made to the guaranteed return by the OGRA on account of UFG losses in excess of the allowed targets, thus, reducing the actual return on assets for SNGPL. OGRA has revised the allowable limits of the UFG losses from FY09 onwards, whereby the upper limit is 5.5% and the lower limit is 4.8%. This rolls into higher UFG penalties and SNGPL suffered a significant hit in FY09 on account of the increase in the disallowance percentage alone. Unaccounted for Gas (UFG) OGRA UFG Band Actual UFG Source: OGRA & CSPL Research

12% 10% 8% 6% 4% 2% 0% FY06

... In FY09, the benefit of higher sales and an increase in asset base was dented by excessive UFG losses which amounted to PKR 6,283mn. The hit on account of the UFG losses was exacerbated by the enormous hike in WACOG ...

FY07

FY08

FY09

FY10F

FY11F

In FY09, the benefit of higher sales and an increase in asset base was dented by excessive UFG losses which amounted to PKR 6,283mn. The hit on account of the UFG losses was exacerbated by the enormous hike in WACOG. Higher UFG losses together with stringent OGRA targets have undermined the bottom line for FY09. In our future estimates, we assume that the UFG losses will display a gradually declining trend, given the company’s planned efforts to curtail them. Exchange Losses Other expenses increased by an exorbitant 210% to PKR 2,975mn in FY09 versus PKR 957mn last year. This was mainly due to exchange losses on gas purchases. However, going forward the rupee is expected to remain relatively stable against the USD. Hence, exchange losses are expected to fall sharply in FY10. Liquidity Concerns ... Def erred Credit & Circular debt The Government has changed the deferred credit mechanism from FY09 onwards whereby the government grants for providing service connections, extension of gas mains and laying of distribution lines are now kept in special project accounts rather than company accounts. This deprives SNGPL of interest income and also creates liquidity issues. Other income declined by 16% to PKR 1,210mn in FY09. This was predominantly due to a drop in the interest income on large cash deposits as a result of a change in the deferred credit mechanism. Furthermore SSGCL has entered into an agreement with SNGPL for uniform pricing of gas. Under this agreement, the company with a higher weighted average cost of gas raises a demand to the other company of the amount necessary to equalize the cost of gas for both companies. As a consequence of this agreement, SSGCL has raised a demand of PKR 28,321mn under this head during the current period.

... The circular debt issue, coupled with the altered deferred credit mechanism has adversely impacted the liquidity position of the company...

The circular debt issue, coupled with the altered deferred credit mechanism has adversely impacted the liquidity position of the company. Huge payables particularly to SSGCL as discussed above have aggravated the situation, leaving it with negative working capital. SNGPL will also be a beneficiary in the event of the resolution of the circular debt issue. As at the year end, SNGPL’s receivables against the circular debt amounted to PKR 17bn. It had to receive PKR 2.378bn from WAPDA, PKR 1.08bn from the Government Page 5

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GAS DI STRIBUT ION

OCTO BER 23, 2009

Sui Northern Gas Pipelines Limited - Initiating Coverage of Pakistan, PKR 12.336bon GDS and PKR 1.483bn from other government consumers while it had net payables of PKR 20.658bn. *As of Oct 31-208

Wellhead Gas Prices ... A rise in the well head gas prices increases WACOG and adds on to the losses on account of UFG as was the case in FY09 ...

The wellhead gas prices are linked to international oil prices. With oil prices showing a downward trend, it is expected that well head prices will decline. A rise in the well head gas prices increases WACOG and adds on to the losses on account of UFG as was the case in FY09. Going forward, reduction in wellhead prices is expected to reduce the cost of Unaccounted For Gas (UFG) losses for SNGPL and will improve profitability. Expansion Plans

... OGRA has restricted the addition of fixed assets to PKR 11.4bn in FY10 as against the requested amount of PKR 18.5bn ...

OGRA has restricted the addition of fixed assets to PKR 11.4bn in FY10 as against the requested amount of PKR 18.5bn. This is quite low as compared to the record addition of over PKR 22bn that the company made to its operating fixed assets in FY09. Asset Additions (PKRbn) Source: Company financials & CSPL Research 20 18 16 14 12 10 8 6 4

    3     0     Y     F

    4     0     Y     F

    5     0     Y     F

    6     0     Y     F

    7     0     Y     F

    8     0     Y     F

    9     0     Y     F

    F     0     1     Y     F

    F     1     1     Y     F

    F     2     1     Y     F

Currently construction activities of Project IX are underway. Project IX was initiated in 2006 to absorb additional gas supply from newly discovered gas fields. The final segment of 20km Darra Adam Khel segment of 24-inch Gurgury-Kohat-Nowshera line is being completed. This is a difficult portion of the project given the rugged terrain and the volatile situation in the area. SNGPL as a contractor is carrying out construction of 20-inch 38km line for Engro Fertilizers plant in Sindh. It is also laying 104km fiber optic cable for MOL Pakistan in the Karak area. Construction of 28-inch 12km water line for Fatima Fertilizers is also being carried out on a contract basis. The company has also submitted a technical bid to SONATRECH (Algerian National Gas Company) for prequalification as contractor on EPC Basis for participation in tender covering 504km in 20”/24” diameter pipeline project in Algeria.

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CROSBY

GAS DI STRIBUT ION

OCTO BER 23, 2009

Sui Northern Gas Pipelines Limited - Initiating Coverage Future Outlook *As of Oct 31-208

Going forward, interest income will continue to be affected by the change in the deferred credit mechanism. This has the potential to create working capital management issues which may increase reliance on short term financing and inflate financial charges. Liquidity issues may restrict the management’s capacity expansion plans. Also the asset additions undertaken will be subject to approval by the OGRA. We foresee that despite the active measures, the company will be unable to bring UFG losses in line with OGRA standards and the UFG woes will continue to be a drain on profitability. WACOG is expected to decline during FY10. This is because of the average decline in oil prices during 2HFY09 by 37%. This will push up SNGPL’s profitability via lower UFG costs. ... It is expected that the benefit of the reduction in WACOG translating into lower UFG cost will be dampened by lower levels of other income, liquidity shortage and lower asset additions approved by OGRA....

However, the company needs to curb its UFG losses which offset the impact of any additions to the asset base. It is expected that the benefit of the reduction in WACOG translating into lower UFG cost will be dampened by lower levels of other income, liquidity shortage (as a result of a change in the deferred credit mechanism) and lower asset additions approved by OGRA. Furthermore, the government has mandated SNGPL to reinstate a large number of employees who were inducted during the period between 1996 and 1998 and were relieved later on. The additional salaries will be a huge burden on SNGPL. Incremental costs will also arise from reimbursement of prior year payments to these employees. Additionally, it will give rise to human resource management issues as well. This, however, is not expected to impinge the profitability of the company due to the predefined return formula based on operating assets.

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GAS DI STRIBUT ION

OCTO BER 23, 2009

Sui Northern Gas Pipelines Limited - Initiating Coverage Company Background *As of Oct 31-208

... Sui Northern Gas Pipelines Limited (SNGPL) is the largest integrated gas company involved in the operation and maintenance of high-pressure gas transmission and distribution systems ...

Sui Northern Gas Pipelines Limited (SNGPL) is the largest integrated gas company involved in the operation and maintenance of high-pressure gas transmission and distribution systems. It also undertakes the planning, designing and construction of pipelines, both for itself and other organizations. SNGPL operates in North Central Pakistan through an extensive network in Punjab and NWFP. SNGPL’s transmission system extends from Sui in Balochistan to Peshawar in NWFP, comprising over 7,347km of transmission system and 59,951km of distribution pipelines. SNGPL has an authorized capital of RS 15,000 million. The Government and the Government controlled institutions and Dawood Hercules Chemicals Limited shareholdings are 36% and 20% respectively with the remaining 44.21% held by the

private sector.

Shareholding Pattern of SNGPL Source: Company Reports

President of Pakistan 36.0%

Others 4.6%

General Public 4.9% Associated Companies & Related parties 19.7%

Dawood Hercules Chemicals Limited 18.3% Banks, DFIs NBFI, Insurance Cos Modarbas & Mutual Funds 13.4%

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NIT & ICP 3.7%

CROSBY

GAS DI STRIBUT ION

OCTO BER 23, 2009

Sui Northern Gas Pipelines Limited - Initiating Coverage

Sector Overview *As of Oct 31-208

Natural G as…Leading The Way ... The supply mix is tilted toward natural gas which continues to be the largest energy source with a lion’s share of 48% in the total energy supply ...

Pakistan’s primary energy supply stands at 62.9 million TOE (tons of oil equivalents) in FY08. The supply mix is tilted toward natural gas which continues to be the largest energy source with a lion’s share of 48% in the total energy supply followed by other thermal sources at 39%, hydro at 13% and nuclear at a tiny 0.7%. Poor quality of coal reserves, the mounting burden of oil imports and unreliability of hydro sources has led to this unsustainably high dependence on natural gas. Primary Energy Supplies By Source Source: Energy Yearbook 2008 Nuclear,

Hyrdro,

0.7%

12.2% Coal, 9.2%

Oil, 30.5%

Gas , 47.5%

Mismatch … Growing Demand and Lagging Supply ... The natural gas consumption is on an uptrend and has increased rapidly during the last few years ...

At present, the country’s natural gas consumption is sourced domestically. The recoverable reserves stand at 29.67 trillion cubic feet. The natural gas consumption on the other hand is on an uptrend and has increased rapidly during the last few years at a CAGR of 8.5% amounting to 1,275 billion cubic feet in FY08. 1,300

Natural Gas Consumption - bcf Source: Energy Yearbook 2008

1,250 1,200 1,150 1,100 1,050 1,000 950 900 850 800 FY03

FY04

FY05

FY06

FY07

FY08

Annual Growth Rate in Natural Gas Consumption Source: Energy Yearbook 2008 21.00%

16.00%

11.00%

6.00%

1.00% FY03 -4.00%

Page 9

FY04

FY05

FY06

FY07

FY08

CROSBY

GAS DI STRIBUT ION

OCTO BER 23, 2009 ... The jump in the natural gas demand was due to increasing availability of cheaper local gas and the government policy of attracting expansion in the power generation sector based on indigenous fuel ....

Sui Northern Gas Pipelines Limited - Initiating Coverage The jump in the natural gas demand was greatest in FY04 because of increasing availability of cheaper local gas and the government policy of attracting expansion in the power generation sector based on indigenous fuel. The number of gas consumers has also increased at a growing rate since FY03. In FY08, the number of consumers was 5.3mn, 8.2 % higher than last year. *As of Oct 31-208

Number of Gas Consumers - Million Source: Energy Yearbook 2008

5.5

5.0

4.5

4.0

3.5

3.0 FY03

FY04

FY05

FY06

FY07

FY08

The power sector accounts for the largest portion of the gas consumed followed by the industry, fertilizer and other sectors. The following figure shows Natural Gas consumption by sector. Natural Gas Consumption by Sector Source: Energy Yearbook 2008 Cement 1.0%

General Industry 25.3%

Commercial 2.7%

Fertilizer (Fuel) 12.6% Fertilizer (Feedstock) 3.1%

Domestic 16.0% Transport 5.6%

Power 33.7%

The net demand for natural gas has increased by almost 8.5 % annually during FY03FY08, reaching around 1,275 billion cubic feet in FY08 against the total production of 1,454 billion cubic feet. However, the country is walking headlong into a natural gas shortage. The statistics indicate that supplies will rapidly start depleting after FY11FY12. Going forward, we project that demand will exceed supply in FY11 by approximately 32 billion cubic feet propelled by a recovering economy. Natural Gas Demand Supply - bcf 2400

Demand

Supply

Source: CSPL Research

2200 2000 1800 1600 1400 1200 1000 800

   3    0    Y    F

   4    0    Y    F

   5    0    Y    F

   6    0    Y    F

   7    0    Y    F

   8    0    Y    F

   9    0    Y    F

   F    0    1    Y    F

   F    1    1    Y    F

   F    2    1    Y    F

   F    3    1    Y    F

   F    4    1    Y    F

   F    5    1    Y    F

   F    6    1    Y    F

At the existing rate, the gap will increase to 540 billion cubic feet by FY16.

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OCTO BER 23, 2009

Sui Northern Gas Pipelines Limited - Initiating Coverage Demand Supply Plan for FY10 *As of Oct 31-208

... SNGPL has already served notices of gas load shedding from November 2009 to March 2010 ....

With the winter season coming up the Sui twins are anticipating a potential gas shortfall of over 1000mmcfd. SNGPL has already served notices of gas load shedding from November 2009 to March 2010. According to this plan gas supply will be curtailed to low priority segments of the economy. This would mainly include cement and the non committed power sector. SNGPL would thus be able to save up to 530 mmcfd of gas in January and divert to other priority areas. Help on the Way…Natural Gas Sourcing Plans In order to diversify sources of natural gas supplies, the Government has engaged in projects for importing piped natural gas and LNG from neighboring countries. LNG SSGC is acting as the facilitator for the Pakistan Mashal LNG Project. It is a 3.5mtpa (million tons per annum), equivalent to 500mmcfd of gas, LNG import project with a re-gasification facility which will be located in Karachi. The first supply of LNG is expected in the year 2011. Gas Imports Interstate Gas Systems (ISGS) is a private limited Company incorporated in Pakistan and is a joint venture between SSGCL and SNGPL. The controlling interest of the two major gas utilities is 51% and 49% respectively. In view of its current shareholding, ISGS, under the Companies Ordinance 1984, is a subsidiary of SSGC. ISGS has been mandated by the Government to explore and make arrangements for import of natural gas from neighboring countries.

Iran Pakistan Pipeline The first major upcoming project is the Iran Pakistan Gas Pipeline which is expected to come online by FY14. The project envisions the import of 750mmcfd of natural gas. The pipeline is proposed to start from Asalouyeh and stretch over 1100km through Iran. Pakistan will construct a 1000km pipeline from the border, traversing along the Makran Coastal Highway to connect with Pakistan’s existing gas transmission network at Nawabshah. The pipeline will be supplied from the South Pars field. The diameter of the pipeline will be 42 inches which is estimated to cost USD 3.5bn, and will take around four years to complete. The project will support around 4,000MW power generation capacity, which will help in overcoming the power crisis. Trans-Afghanistan Pipeline The second project is the Trans-Afghanistan Pipeline (TAP or TAPI) which will transport natural gas from Turkmenistan through Afghanistan into Pakistan. The gas will be supplied from Douletabad and other fields in Turkmenistan. The 1680km pipeline will have a design capacity of 3.2bcfd and will cost USD 7.6bn. Will the benefit trickle? However, these projects cannot be taken as a positive trigger for the gas distribution companies as they earn a fixed return according to the return formula. Also both companies earn a return only on those assets that become operational which is not expected for the above mentioned projects for another four to five years.

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OCTO BER 23, 2009

Sui Northern Gas Pipelines Limited - Initiating Coverage Gas Distribution ... The Key Players *As of Oct 31-208

The Gas Distribution sector comprises of two public-sector companies operating in different regions across Pakistan. These are Sui Southern Gas Company Limited (SSGC) operating in Sindh and Baluchistan and Sui Northern Gas Pipelines (SNGPL) in Punjab, NWFP and Azad Kashmir region. These gas distribution companies operate through a transmission and distribution network of over 102,187 KM spread across Pakistan.

Transmission and Distribution System - Kms SNGP

70,000

SSGC

Source: Company Financials

65,000 60,000 55,000 50,000 45,000 40,000 35,000 30,000 25,000 20,000 FY03

FY04

FY05

FY06

FY07

FY08

Tariff Regime ... The Safety Net ... Under the tariff regime governed by the OGRA, both SSGC and SNGPL are required to earn an annual return of not less than 17% and 17.5% respectively per annum on the value of its average fixed assets in operation....

Under the tariff regime governed by the OGRA, both SSGC and SNGPL are required to earn an annual return of not less than 17% and 17.5% respectively per annum on the value of its average fixed assets in operation (net of deferred credit on jobs completed), before corporate income taxes, interest and other charges on debt and after excluding interest, dividends and other non operating income. Any deficit or surplus on account of this is recoverable from or payable to the Government as differential margin or gas development surcharge. As per the regulations, OGRA determines the consumer prices while distribution companies are entitled to claim any shortfalls in their revenue that includes the gas purchase prices from E&P companies, other operating expenses and a pre-defined operating margin (as per the return formula).

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Sui Northern Gas Pipelines Limited - Initiating Coverage Required Return Calculation *As of Oct 31-208

Following is a format of the calculation of the required return and differential margin/gas development surcharge:-

A

Net revenue

B

Less: Operating Expenses excluding financial charges

C

Profit/(Loss)

D

Add: Non admi ssi ble Expendi tures Less: Non operating Income

E

Operating Profit /(Loss)

Required Return on Net assets I

Average Net Fixed Assets

II

Less: Average Deferred Credit of completed jobs

III

Average Net Fixed Assets after Average Deferred Credit

IV

Required Return on net assets (Avg. ~17% - 17.5%)

V

Amount of return required

VI

Shortfall over Return required (E-V)

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(III * IV)

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GAS DI STRIBUTI ON

OCTOBER 16, 2009

Role of USD-PKR parity in the re-emergence of foreign portfolio investments

Research Team: Rehan Uddin, CFA, ACA

Head of Research & Corporate Advisory

[email protected]

+92-21-35615855

Fatima Anis, ACA

Deputy Head of Research

Banks

[email protected]

+92-21-35615856

Shahid Ali

Research Analyst

Refinery, Fertilizer & OMC

[email protected]

Ext.543

Pershotam Lal

Research Analyst

E&P, Cement

[email protected]

Ext.544

Omair Iqbal

Research Analyst

Economy, Insurance & Autos

[email protected]

Ext.542

Madeeha Akhtar

Research Analyst

Gas Distribution, IPP

[email protected]

Ext.545

Sales T eam: Syed Kashif Mustafa

Head of Sales & Business Development

[email protected]

+92-21-35615859-60

Muhammad Irfan Naviwala

[email protected]

+92-21-35615830

Faisal Kapadia

[email protected]

+92-21-35615828

Sohail Shaikh

[email protected]

+92-21-35615832

Naveed Ahmed

[email protected]

+92-21-35615824

Muhammad Khurram

[email protected]

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This report is prepared and published by: Research De partment Crosby Securities Pakistan (Pvt.) Ltd 4th Floor, PRC Towers, M.T Khan Road, Karachi. Pakistan +92-21-35615861-66 [email protected]

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