Corporate Briefing Session 2018-19: Natural Gas Impact on Pakistan's Economy

CORPORATE BRIEFING SESSION (CBS) 2018-19 1 Corporate Briefing Session (CBS) 2018-19

INTRODUCTION Incorporated in 1963 Converted to Public Limited in 1964 Authorized Share Capital Rs. 15 Billion No. of consumer more than 6.9 Million 16 Regional Offices 3 Transmission Offices 2 Corporate Briefing Session (CBS) 2018-19

VISION AND MISSION VISION To be the leading integrated natural gas provider in the region seeking to improve the quality of life of our customers and achieve maximum benefit for our stakeholders by providing an uninterrupted and environment friendly energy resource. MISSION A commitment to deliver natural gas to all door steps in our chosen areas through continuous expansion of our network, by optimally employing technological, human and organizational resources, best practices and high ethical standards. 3 Corporate Briefing Session (CBS) 2018-19

SHAREHOLDING PATTERN SHARES HELD 200,931,210 PERCENTAGE (%) NAME OF INSTITUTIONS THE PRESIDENT OF ISLAMIC REPUBLIC OF PAKISTAN 31.68 PAKISTAN INDUSTRIAL DEVELOPMENT CORP. (PVT) LTD. 38,164,538 6.02 STATE LIFE INSURANCE CORPN. OF PAKISTAN 27,483,137 4.33 NATIONAL BANK OF PAKISTAN 27,406,011 4.32 SNGPL EMPLOYEES EMPOWERMENT TRUST 27,399,709 4.32 NATIONAL INVESTMENT TRUST 21,015,257 3.31 PAKISTAN REINSURANCE COMPANY LTD. 8,698,203 1.37 PICIC FUNDS 12,399,270 1.96 SUI SOUTHERN GAS COMPANY LIMITED 2,414,174 0.38 IDBL (ICP UNIT) 325,267 0.05 Others & General Public 267,979,889 42.26 Grand Total 634,216,665 100.00 4 Corporate Briefing Session (CBS) 2018-19

IMPACT OF NATURAL GAS ON ECONOMY PAKISTAN'S ENERGY MIX SECTOR-WISE CONSUMPTION OF NG/LNG in SNGPL network Industry 18.6% Nuclear Electricity 2.8% Hydro Electricity 7.8% Renewable Electricity 1.3% Fertilizer 2.1% Power 29.5% Share of Gas 0.0% Oil 25.8% Coal 15.4% CNG 5.8% LPG 1.1% LNG 10 Commercial 3.2% Gas 35.1% Domestic 40.7% 5 5 Corporate Briefing Session (CBS) 2018-19

OPERATIONAL OVERVIEW Punjab Khyber Pakhtunkhwa Consumers > 6.9 Million Consumers Distribution > 138,000 Km > 47,00 Towns & Villages Transmission >9,000 Km Azad Jammu Kashmir Compression 226,200HP 10 Compressor Stations Gas Sources 39 Gas Sources Islamabad Capital Territory Assuming an average size of a family as 6 persons, about 28% of the population in SNGPL s franchised area is fed through our system. 6 Corporate Briefing Session (CBS) 2018-19

RELIANCE ON RLNG Due to rapid depletion of indigenous gas there was : Under-utilization of Gas Based Power Generation. Load profiling of Domestic Sector consumers. Shut down for the Industrial sector (4 hrs/day gas supply while 50-60 % units were not operative). Fertilizer & CNG sectors were also curtailed. To mitigate the above challenges RLNG was injected into the system. 2014-15 2015-16 2016-17 3% 19% 31% Indigenous Gas RLNG Supply 69% 81% 97% 2018-19 2017-18 2019-20 43% 48% 50% 50% 52% 57% 7 7 Corporate Briefing Session (CBS) 2018-19

SNGPL GROWTH OVERVIEW Presently 4,700 Kms of new network is under process while another 21,169 Kms of network is yet to be laid/sanctioned. As a consequence of laying additional 26,000 Kms network, an additional 1.8 Million consumers shall become eligible for gas connections. The total cost against network being laid/to be laid is Rs 70 Billion approximately. Currently 2.7 Million applications for gas connections are pending while another 800,000 are being added every year on SNGPL network. 8 8 Corporate Briefing Session (CBS) 2018-19

Common misconceptions Like ordinary companies, SNGPL increases its sale prices to earn extraordinary profits. This is not true, as the gas purchase price and sales price, both are determined by GOP / OGRA under a defined scheme of arrangements and as such SNGPL is only entitled to a defined rate of return on its operating assets. SNGPL operates on a cost plus formula, under which all costs as determined by OGRA are allowed as operating expenditures. As regards profitability, Company is entitled to a fixed rate of return of 17.43% on average fixed assets. Why SNGPL incurs a loss if all costs are operating expenditures and fixed rate of profit is also allowed? Although all costs are considered as operating expenditures however UFG over and above the benchmark fixed by the regulator is disallowed as operating expenditure and is borne out of the profit of the Company. Lately OGRA has started to disallow certain expenses. Company however is contesting the case at all forums. In addition, the provision for doubtful debts over and above amount as determined by OGRA are also disallowed as operating expenditures and as such are borne out of the profits of the Company. 9 Corporate Briefing Session (CBS) 2018-19

Important information / misconceptions How profitability of SNGPL can be enhanced ? By reducing disallowances on account of UFG and provision for doubtful debts and other operating expenses; and By increasing non operating income and reducing non operating expenditures. UFG losses are borne by the consumers OGRA has fixed a benchmark for each financial year and as such all amounts exceeding the benchmark are borne out of the profits of the Company and not borne by the Consumers. Employees of the company get free gas facility Subordinate employees are entitled to a fixed number of units on an annualized basis. Except for some retired executives, no executive is entitled to any free gas facility. 10 Corporate Briefing Session (CBS) 2018-19

FINANCIAL HIGH LIGHTS 11 Corporate Briefing Session (CBS) 2018-19

Tariff Regime The OGRA vide its decision dated June 21, 2018 on the Estimated Revenue Requirement ('ERR') of the Company for the year 2018-19 revised the tariff regime including the rate of return . The revised ROA is based on a dynamic Weighted Average Cost of Capital ('WACC') instead of the earlier static ROA of 17.5% on the average net operating assets. Weighted Average Cost of Capital ('WACC') was computed as 17.43% for financial year 2018-19 and onwards, however, the same will automatically reset if the reference figure changes by 2%. As per the revised tariff regime, the Company is required to earn an annual return of not less than Weighted Average Cost of Capital ('WACC') on the value of its average fixed assets in operation (net of deferred credit). The ROA is fixed for next 3 years provided that if the WACC changes by 2% then OGRA will re-set and adjust it in the next determination of revenue requirement. Company's UFG benchmark was set at 5% base rate and 2.6% based on fulfillment of KMIs. 12 Corporate Briefing Session (CBS) 2018-19

DOWN STREAM GAS SECTOR PRICING STRUCTURE LPS T & D Cost, 10.93% Gas INDIGENOUS GAS Indigenous gas pricing structure is governed under OGRA Ordinance, 2002 and Natural Gas Tariff Rules, 2002. (Payable), 0.35% Internally Consumed , 0.64% OGRA Law ensures that revenue requirement of the company is met through the tariff determination process. Return on Assets , 10.95% Revenue Requirements=Cost of gas + Operating Expenses Operating Income + Return on Assets Following formula explains the tariff structure: Cost of Gas Sold, 77.13% RLNG RLNG pricing is governed under PDL Ordinance, 1961 and policy guidelines issued by the Federal Govt. from time to time. Transpor tation chgs. 1.33% Deprecia tion, 0.75% HR Cost, 0.14% Amortiza tion of Deferred Credit, - 0.15% Through ECC decisions, RLNG price has been ring fenced to avoid any related financial burden on indigenous gas subsidized consumers. GIC 0.89% Return on Assets 1.52% Since RLNG has been declared as a petroleum product, therefore, its price is determined on monthly basis. Any increase or decrease in imported LNG price is immediately passed on to the end consumers so that the LNG supply chain remains functional. Cost of RLNG, 95.51% 13 13 Corporate Briefing Session (CBS) 2018-19

HIGHLIGHTS OF ACCOUNTS Description unit 2014-15 2015-16 2016-17 2017-18 2018-19 Gross Capitalization Rs in million 17,944 27,902 45,961 47,760 23,256 Return on Assets Rs in million 12,769 15,055 18,970 23,959 26,531 UFG disallowance Rs in million 11,639 7,518 5,448 6,356 10,528 Other disallowances Rs in million 2,228 1,737 - - 1,104 UFG % 10.97 9.21 8.07 10.93 11.86 Profit/(Loss) before Taxation Profit after Taxation Rs in million (3,363) (140) 12,539 15,475 11,149 Rs in million (2,494) 124 8,615 11,121 7,076 Earning per Share (EPS) Rs per share (3.93) 0.2 13.58 17.54 11.16 Effective Return % (1.76) 2.79 12.83 13.86 10.10 14 Corporate Briefing Session (CBS) 2018-19

Category wise Sales Volume MMCF YEAR 2017-18 2018-19 System Gas 387,508 402,452 RLNG 283,136 352,646 Total 670,644 755,098 2017-18 2018-19 System Gas 42% System Gas 47% 53% 58% RLNG RLNG 15 Corporate Briefing Session (CBS) 2018-19

Profit / (Loss) after tax Rs in million YEAR 2014-15 2015-16 2016-17 2017-18 2018-19 Amount 7,076 (2,495) 124 8,614 11,121 12,000 11,121 10,000 8,614 8,000 7,076 6,000 4,000 2,000 124 - 2014-15 2015-16 2016-17 2017-18 2018-19 (2,000) (2,495) (4,000) Rupees in million 16 Corporate Briefing Session (CBS) 2018-19

Dividend % per Share YEAR 2014-15 2015-16 2016-17 2017-18 2018-19 Percentage per share 35% - - 60% 70.05% 80.00 70.05 70.00 60.00 60.00 50.00 35.00 40.00 30.00 20.00 10.00 - - - 2014-15 2015-16 2016-17 2017-18 2018-19 % per share 17 Corporate Briefing Session (CBS) 2018-19

Earnings/(Loss) per Share YEAR 2014-15 2015-16 2016-17 2017-18 2018-19 Rupee per share (3.93) 0.20 13.58 17.54 11.16 20.00 17.54 13.58 15.00 11.16 10.00 5.00 0.20 - 2014-15 2015-16 2016-17 2017-18 2018-19 (5.00) (3.93) (10.00) Rupee per share 18 Corporate Briefing Session (CBS) 2018-19

Breakup value per Share YEAR 2014-15 2015-16 2016-17 2017-18 2018-19 Rupees per share 33.18 5.63 5.83 16.71 29.45 33.18 35 29.45 30 25 20 16.71 15 10 5.83 5.63 5 0 2014-15 2015-16 2016-17 2017-18 2018-19 Rupee per share 19 Corporate Briefing Session (CBS) 2018-19

Dividend payout ratio YEAR 2014-15 2015-16 2016-17 2017-18 2018-19 Dividend payout % - - 44.17 40.2 31.37 50.00 44.17 45.00 40.2 40.00 35.00 31.37 30.00 25.00 20.00 15.00 10.00 5.00 - - - 2014-15 2015-16 2016-17 2017-18 2018-19 % 20 Corporate Briefing Session (CBS) 2018-19

Debt Equity Ratio % YEAR 2014-15 2015-16 2016-17 2017-18 2018-19 Debt Equity % 79.05 82.87 91.10 84.14 78.05 95.00 91.10 90.00 84.14 85.00 82.87 79.05 80.00 78.05 75.00 70.00 2014-15 2015-16 2016-17 2017-18 2018-19 % 21 Corporate Briefing Session (CBS) 2018-19

FUTURE PROSPECTS About 300 K.M different diameter system augmentation pipeline are planned to absorb 1000 MMCF TAPI gas in the system along with additional investment in compression equipment of 17,500 HP. Approximately 270 K.M different diameter pipelines are planned for absorption of 500 MMCFD IP gas into the system. Construction process of North South pipeline 1100 K.M pipeline are at advanced stage of deliberation and Govt. may decide to give due role to SNGPL in this regard. The company is in active participation in bidding process for the construction of gathering and sales pipelines of certain gas producers. In addition Company is actively perusing certain other initiatives for tapping additional revenue streams including but not limited to working as EPC contractor and consulting services in Compression facilities. 22 Corporate Briefing Session (CBS) 2018-19

Thank You! 23 Corporate Briefing Session (CBS) 2018-19