HUBCO KEEN TO BUY 51% SSGC SHARES

SSGC has become the most attractive organization on the back of its profits and ever-increasing gas prices in Pakistan

By AMANULLAH BASHAR
Jan 30 - Feb 05, 2006

Responding to the Expression of Interest invited by the Privatization Commission, the Hub Power Company Limited, one of the largest Independent Power Producers (IPPs) in Pakistan, has geared up its efforts to participate in the bidding of SSGC which is on the top of privatization agenda.

In the back drop of strong financial health and lucrative future plans for expansion, SSGC has become the focal point for foreign investment on the back of improved profitability prospects and favorable future outlook.

According to financial assessment, SSGC's earnings for the first half of the current financial year 2005-06 (July - December 2005) is expected to depict 4.5% upsurge to Rs548m compared to Rs524million during the corresponding period of last year.

HUBCO generates around 1300 MW of power which, under the energy policy 1994, is bought by WAPDA. In order to ease power shortage faced by the KESC, the government had decided that the entire power generated by HUBCO should be injected into KESC system through a direct transmission line which is under construction and scheduled to start transmitting power to KESC from April this year.

It may be mentioned that HUBCO has also applied for setting up two more power plants initially of 300MW and another of 600MW, which is waiting for government's approval. The delay in the approval of the two proposed power plants is caused due to constraints in gas supply. It is expected that if HUBCO turns to be a successful bidder of the SSGC then there would be no hitch in its plans for establishing two more power plants.

In fact, the SSGC has become the most attractive organization on the back of its profits and ever increasing gas prices in Pakistan. Besides HUBCO, there should be a long queue of foreign buyers for the SSGC, which in fact is considered as a gold mine in the energy sector of Pakistan.

The financial health of the SSGC indicates that the net sales of the company stood at Rs13,635million, 10% higher compared to Rs12,375million during the corresponding period last year. Nonetheless, 15% hike in costs of sales resulted in the 23% and 224% respective decline in gross profit and operating profit of the company. Other operating income witnessed an exceptional increase of 109% to Rs984m on the back of higher income from Jamshoro Joint Venture Limited (JJVL) at Rs475m. Financial charges also increased by 53% to Rs226m compared to Rs148m previously on account of increased rates as well as growth in quantum of loans. The sales volume of the company also depicted 2% surge to 85,933 MMCF while the cost of gas per MMCF also increased by 11%. Privatization prospects and progress on the regional gas pipeline SSGC's valuations are expected to receive a boost on progress on the regional gas pipeline project, privatization front and hike in gas tariffs.

Recently, the Privatization Commission (PC) has invited Expression of Interests (EoI) for the sale of 51% stake of SSGC along with the management control. The last date for submission of Statement of Qualifications (SoQ) is March 04, 2006. Privatization stories tend to improve investor sentiment and enrich valuations. In the case of the Suis, headways in privatization are positive in the sense that there could be modifications in the return formula applicable to them to make the Suis attractive for strategic buyers. Regarding a regional gas pipeline project, there seems to be significant progress towards an agreement between Iran, Pakistan and India. In the event of such a development, the Suis would benefit via expansions in their domestic infrastructure and asset base and secondly through returns from Inter State Gas Systems (Pvt) Ltd. (ISGSL). SSGC has set an ambitious Rs36bn capital expenditure plan till 2008. The project is to be financed with debt and internal funds in roughly the same proportion. This expansion covers the Phase II of the company's Gas Infrastructure Rehabilitation and Expansion Plan (GIREP-II). Though given the company's historical track record the quantum of the actual annual capex may turn out to be less than envisaged. Nonetheless, with earnings linked to operating fixed assets, aggressive additions to the company's asset base are to significantly fuel SSGC's future earnings.

SGC ENTERING LNG PROJECT

Pakistan's LNG import project was in the limelight at the CWC 6th World LNG Summit held in Rome, Italy, from November 30 - December 1, 2005. The summit, an annual event, brought together nearly 400 delegates representing about 200 companies from around the world.

Some of the world's most reputable companies engaged in the exploration, refining, production, offshore and on-land terminals, shipping and transportation, fabrication of liquefaction and de-gasification facilities, LNG carrying vessels as well as financial or technical consultancy participated in the two-day summit. Many of the delegates visited the Pakistan stall in the exhibition area and asked questions about SSGC's integrated LNG import project and the oil and gas industry.

The Pakistan stall at the exhibition also distributed information about the country, the oil and gas sector, OGDC, PSO, PPL, SSGC and SNGPL in the shape of country booklet, statistics annual reports, brochures, CDs and leaflets.

The speakers' panel and session chairs comprised over 30 of the most respected names in the world, in the Oil and Gas business including former ministers as well as heads of companies and conglomerates and who had traveled from six continents to Rome, Italy for the Summit. Dr. Alirio Parra, former Minister of Mines and Energy in Venezuela and Senior Associate of CWC Limited chaired the summit on both days.

Presenting his dissertation titled: "Pakistan Gas Sector: Meeting the Energy Gap through LNG", in the second session, Munawar Baseer Ahmad, MD SSGC, concentrated on LNG supply integration with Pakistan's indigenous energy resources. His presentation included an overview of the investment scenario in upstream and downstream development of the industry, the current energy mix and outlook for the future, the emerging energy gap and the role of LNG as well as transnational pipelines in closing the gap over the next 25 years.

Mr. Ahmad informed the audience that Pakistan is already preparing to set up an LNG import terminal at Karachi with an initial capacity of 2.5 mtpa equivalent to 300 mmcfd of natural gas. The project with an estimated capital investment of US$400 million is set for completion in 2009, and will supplement indigenous supplies of gas, to ensure sustained availability of natural gas, particularly to the industrial and power sectors. He updated the delegates on the status of SSGC's integrated LNG import project and took them through the stages leading to the "first gas landing" expected in Q4, 2009.