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Companies unable to declare cash dividend despite handsome profit

By SHABBIR H. KAZMI
Dec 13 - 19, 1999

Two of the largest gas distribution companies despite earning handsome profit have not declared any cash dividend for the year ending June 30, 1999. This was a little disappointing for the market as it was expected that SSGC would announce 15 per cent cash dividend, at least. The after tax profit of Sui Southern Gas Company (SSGC) was Rs 953 million and for Sui Northern Gas Pipelines (SNGPL) Rs 426 million. The reasons for skipping cash dividend seems to be inadequate cash flow, large scale borrowing and huge financial charges incurred by both the companies.

Both the gas distribution companies were able to post higher profit due to depressed international oil prices as the local gas price is linked to these prices. However, the recent increase in international prices of crude is expected to affect the profitability of these companies next year. While the capacity utilization at SSGC is expected to improve further, SNGPL will continue to suffer from inefficient utilization of transmission and distribution network.

SSGC

During the year under review SSGC witnessed 5 per cent growth in sales and profitability improved by 42 per cent. This was the cumulative effect of increased sales, reduction in gas purchase price, increase in asset base and decrease in financial charges. A major accomplishment of the year was the resolution of inter corporate debt problem. While gas purchase volume increased by about 5 per cent, the cost of gas declined by nearly 20 per cent. During the year 579 kilometers of new mains and service pipelines were laid and another 170 kilometers were rehabilitated/replaced.

The after tax profit of SSGC jumped from Rs 652 million in 1998 to Rs 953 million in 1999. This was mainly due to reduction in cost of sales, higher profit from meter manufacturing division, other income and reduction in financial charges. The other expenses registering increase were depreciation and taxation. The depreciation expenses increased from Rs 1.753 billion in 1998 to Rs 1.849 billion in 1999 and taxation jumped from Rs 375 million to Rs 512 million during the period under review.

The gross sales of the Company increased from Rs 15.623 billion in 1998 to Rs 16.349 billion in 1999,. but the net sales decreased from Rs 15.833 billion to Rs 14.055 billion. Despite the reduction in net sales, SSGC was able to post higher gross profit which increased from Rs 5.736 billion to Rs 5.948 billion during the period under review.

SNGPL

Out of the total gas purified by SSGC ,48 per cent is bought by SNGPL which is responsible for distribution of gas to Punjab and NWFP. Like SSGC, the net sales of SNGPL came down but due to reduction in the cost of gas purchase gross profit was higher — from Rs 7.395 billion in 1998 to Rs 7.823. While there was a marginal reduction in operating cost, depreciation cost increased from Rs 2 billion to Rs 2.28 billion and operating profit from LPG operations nearly doubled in 1999 . Similarly financial charges also increased from Rs 3.258 billion to Rs 3.463 billion during this period.

OUTLOOK

The GoP has decided to sell and privatize several public sector enterprises. SSGC and SNGPL are also on the list for privatization and it has been resolved to divest non-core activities of SSGC first. The Privatization Commission has constituted a Co-ordination Committee for expediting sale of LPG and meter manufacturing facilities of SSGC.

Profit margin of both the gas distribution companies is expected to come under pressure during 1999-2000 due to hike in crude oil prices. At the same time these companies will be obliged to undertake huge capital expenditures as their profit margin is linked with operating assets. Therefore, depreciation and financial charges are expected to increase further.

Both the companies have been increasing the capital base by regular issues of bonus shares. Apparently, the objective is to enhance the capital base because the formula for determining the profit is expected to change from return on assets to return on equity. However, some analysts say that the increase in capital will have a negative impact as the prospects for good dividend diminishes with large capital base.

Both the companies are expected to suffer due to poor recovery from WAPDA and KESC. Though the intercorporate debt has been resolved for the time being, it is expected to intensify once again. Power sector analysts say that there is an urgent need to rationalize electricity tariff to improve the profit margin of WAPDA and KESC.

Similarly, there is need to increase use of gas in power generation. SSGC has already enhanced the gas allocation to KESC. The enhanced use of gas for power generation can help in reducing furnace oil import bill as well as controlling pollution. The furnace oil currently used by power plants contains over 3 per cent sulphur and causes acid rains.