In a positive step for the energy sector, the Oil and Gas Regulatory Authority (OGRA) has approved a significant portion of the finance cost requested by Sui Northern Gas Pipeline Limited (SNGPL) for the fiscal year 2023. This decision will allow SNGPL to recover Rs. 8.5 billion of its requested finance cost. While the company initially requested Rs. 9.7 billion, OGRA has agreed to pass through 88% of the amount. This move is expected to have implications for SNGPL’s financial outlook and the gas sector as a whole.
What Happened Between OGRA and SNGPL?
SNGPL had requested a finance cost of Rs. 9.7 billion to be allowed as a pass-through. A pass-through means that SNGPL can recover this cost through consumer bills, passing the burden onto the consumers. Initially, OGRA had put the approval on hold, waiting for an independent auditor’s certificate for FY23 before making a decision.
SNGPL then submitted the required certificate, and based on the directives from March 15, 2023, OGRA approved 88% of the requested finance cost, amounting to Rs. 8.5 billion. This decision is based on the understanding that the finance cost is tied to the outstanding amounts related to RLNG (Regasified Liquefied Natural Gas) diversion, subsidized RLNG sales, and receivables stuck in the power sector due to circular debt.
Why Did OGRA Allow the Finance Cost?
The decision by OGRA to approve a substantial portion of the requested finance cost is grounded in specific conditions. SNGPL had a major revenue shortfall of Rs. 589 billion by June 2024. The company has also requested approval for borrowings of Rs. 150 billion to cover this shortfall. Of this, Rs. 40 billion was borrowed based on instructions from the Ministry of Energy to be paid to Pakistan State Oil (PSO).
This financing was mainly used to manage the circular debt issue, including the payment for RLNG subsidies and the differential amounts resulting from RLNG diversion. With these factors in mind, OGRA decided to approve a large portion of the finance cost as a pass-through to SNGPL, allowing it to recover these costs and ease the financial strain.
Implications for SNGPL and the Energy Sector
This approval will have significant implications for both SNGPL’s financial health and for consumers. First, let’s take a look at what this means for SNGPL’s earnings for FY25.
Impact on FY25 Earnings Estimates:
With OGRA now allowing 88% of the finance cost to be passed through, SNGPL’s earnings for FY25 are expected to rise significantly. The company’s earnings per share (EPS) for FY25 could jump to Rs. 26.5, translating into a price-to-earnings (P/E) ratio of 3.9x. This positive financial outlook could help improve investor confidence in SNGPL.
| Key Financial Impact | Details |
|---|---|
| Requested Finance Cost | Rs. 9.7 billion |
| Approved Finance Cost (88%) | Rs. 8.5 billion |
| Estimated EPS for FY25 | Rs. 26.5/share |
| Expected P/E Ratio for FY25 | 3.9x |
Rising Circular Debt and Finance Costs:
SNGPL has faced a continuous rise in circular debt, which has resulted in increased borrowing. As of June 2024, SNGPL’s revenue shortfall stood at Rs. 589 billion. The company has borrowed Rs. 150 billion to address the shortfall, and a significant portion of this borrowing is to deal with the circular debt issue. The approval of this finance cost will allow SNGPL to recover some of these borrowed amounts, which are essential to keep the company afloat amid rising costs.
Why Will Finance Costs Be Allowed for FY25?
OGRA’s decision to allow a pass-through of finance costs is not only about covering current deficits. The primary reason is that the borrowed funds are being used to manage circular debt and cover the subsidies related to RLNG. As long as the financing is linked to these urgent financial needs, OGRA is likely to continue allowing finance costs as pass-through in the future.
Looking Ahead to FY25:
Given that a major portion of the finance cost is being used to manage these ongoing issues, OGRA may allow a similar pass-through in FY25. SNGPL will need to continue to address circular debt and RLNG-related financial shortfalls, and OGRA’s decision to approve the pass-through will likely be reviewed in the coming years.
Summary
The approval of Rs. 8.5 billion in finance costs for SNGPL by OGRA marks a significant step in addressing the financial challenges faced by the company. While it provides short-term relief, it also highlights the ongoing circular debt issue and the need for long-term solutions in Pakistan’s energy sector. The decision will have a positive impact on SNGPL’s earnings, and investors can expect improved financial results for FY25. However, the approval also raises questions about the sustainability of such measures, as Pakistan energy sector continues to grapple with revenue shortfalls and circular debt.
