CROSBY

SECURITIES GAS DISTRIBUTION

OCTOBER 23, 2009 INITIATING COVERAGE

Madeeha Akhtar Sui Northern Gas Pipelines Limited

Valuation
We initiate coverage on SNGPL with a BUY recommendation and a target price of
KATS Code SNGP
PKR 36.34 per share, reflecting an upside potential of 33%. The stock is trading at a PE
Reuters Code SUIN.KA multiple of 6x for FY10F. SNGPL has underperformed the benchmark index, yielding
Current Price PKR 27.29 a return of 27% as compared to the KSE-100’s healthy return of 66%YTD.
Target Price PKR 36.34
Upside Potential 33.00% Profitability Analysis
Shares Outstanding mn 549.11 SNGPL has posted a net Profit After Tax (PAT) of PKR 931mn for FY09 (EPS: PKR 1.69)
Paid Up Capital PKR mn 5,491.10 as compared to PAT of PKR 2,497mn (EPS: PKR 4.55) over the corresponding period
Market Capitalization PKR mn 14,985.21 last year registering a significant decline of 60%. Unaccounted For Gas (UFG) and huge
Free Float 15.00% 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 guaranteed return by the OGRA on account of UFG losses
in excess of the allowed targets. 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
SNGPL - Relative Price Performance
line for FY09. In our future estimates, we assume that UFG losses will display a gradually
PKR / Share
declining trend.
SNGPL KSE-100
40
Exchange Losses
35
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,
30 exchange losses are expected to fall sharply in FY10.

25
Liquidity Concerns … Deferred Credit & Circular Debt
Other income declined by 16% to PKR 1,210mn in FY09. This is due to drop in interest
20
income on large cash deposits as a result of a change in the deferred credit mechanism.
15
This together with the circular debt issue has adversely impacted the liquidity position
of the company.
Feb-09

Jul-09

Oct-09
Jun-09

Sep-09
Jan-09

Apr-09

Aug-09
Mar-09

May-09

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
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
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 DISTRIBUTION
OCTOBER 23, 2009 Sui Northern Gas Pipelines Limited - Initiating Coverage

Table of Contents

SNGPL - Investment Perspective

Valuation ……………………………………… 3
Risks to Valuation ……………………………………… 3

SNGPL - Comprehensive Analysis

Profitability Analysis ……………………………………… 4
UFG Losses… A Drain on Earnings ……………………………………… 5
Exchange Losses ……………………………………… 5
Liquidity Concerns… Deferred Credit & Circular Debt ……………………………………… 5
Wellhead Gas Prices ……………………………………… 6
Expansion Plans ……………………………………… 6
Future Outlook ……………………………………… 7
Company Background ……………………………………… 8

Sector Overview
Natural Gas... Leading the Way ……………………………………… 9
Mismatch… Growing Demand & Lagging Supply ……………………………………… 9
Demand Supply Plan for FY10 ……………………………………… 11
Help on the Way… Natural Gas Sourcing Plans ……………………………………… 11
Will the Benefit Trickle? ……………………………………… 11
Gas Distribution… The Key Players ……………………………………… 12
Tariff Regime… The Safety Net ……………………………………… 12
Required Return Calculation ……………………………………… 13

Key Financials of SNGPL ……………………………………… 14

Page 2
CROSBY GAS DISTRIBUTION
OCTOBER 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 6.58%
Risk Free Rate 12.0%
Risk Premium 6.0%
Beta 0.67
Required Return 16.02%
Sustainable ROE 16.46%
P/BV 1.05
Target Price/share 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

UFG losses account for the major chunk of the drop in the company’s earnings below
... Key risks to our valuation include inability to the required return. High pressure in the pipelines, geographically tough terrains, varying
curtail UFG losses, higher financial charges and tribal cultures, unfavorable political conditions and the law and order situation continue
exchange rate risk ... 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.

Page 3
CROSBY GAS DISTRIBUTION
OCTOBER 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

In FY10, we expect the profitability to improve considerably because of the drop in
considerably because of the drop in WACOG over
Weighted Average Cost Of Gas (WACOG) over the first half of the year. Also we
the first half of the year ...
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 FY05 FY06 FY07 FY08 FY09 FY10F

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

Page 4
CROSBY
OCTOBER 23, 2009
... 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 ...
... The circular debt issue, coupled with the altered
deferred credit mechanism has adversely impacted
the liquidity position of the company...
GAS DISTRIBUTION
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 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 ... Deferred 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. 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
CROSBY
OCTOBER 23, 2009
... 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 ...
... OGRA has restricted the addition of fixed assets
to PKR 11.4bn in FY10 as against the requested
amount of PKR 18.5bn ...
GAS DISTRIBUTION
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
*As of Oct 31-208of PKR 20.658bn.
Wellhead Gas Prices
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. 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
FY10F
FY12F
FY11F
FY09
FY03
FY04
FY05
FY06
FY07
FY08
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.
Page 6
CROSBY
OCTOBER 23, 2009
... 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....
GAS DISTRIBUTION
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.
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.
Page 7
CROSBY GAS DISTRIBUTION
OCTOBER 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 &
Dawood Hercules Related parties
Chemicals Limited 19.7%
18.3% NIT & ICP
3.7%
Banks, DFIs NBFI,
Insurance Cos
Modarbas &
Mutual Funds
13.4%

Page 8
CROSBY GAS DISTRIBUTION
OCTOBER 23, 2009 Sui Northern Gas Pipelines Limited - Initiating Coverage

Sector Overview
*As of Oct 31-208

Natural Gas…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

At present, the country’s natural gas consumption is sourced domestically. The recoverable
... The natural gas consumption is on an uptrend
reserves stand at 29.67 trillion cubic feet. The natural gas consumption on the other
and has increased rapidly during the last few
hand is on an uptrend and has increased rapidly during the last few years at a CAGR
years ...
of 8.5% amounting to 1,275 billion cubic feet in FY08.
1,300
Natural Gas Consumption - bcf
1,250 Source: Energy Yearbook 2008
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 FY04 FY05 FY06 FY07 FY08

-4.00%

Page 9
CROSBY GAS DISTRIBUTION
OCTOBER 23, 2009 Sui Northern Gas Pipelines Limited - Initiating Coverage

... The jump in the natural gas demand was due The jump in the natural gas demand was greatest in FY04 because of increasing availability
to increasing availability of cheaper local gas and of cheaper local gas and
*As of Oct 31-208the government policy of attracting expansion in the power

the government policy of attracting expansion in generation sector based on indigenous fuel. The number of gas consumers has also
the power generation sector based on indigenous increased at a growing rate since FY03. In FY08, the number of consumers was 5.3mn,
fuel .... 8.2 % higher than last year.

5.5 Number of Gas Consumers - Million

Source: Energy Yearbook 2008

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
General Industry
1.0%
Commercial 25.3%
2.7% Fertilizer (Fuel)
12.6%

Domestic Fertilizer
16.0% (Feedstock)
3.1%
Transport Power
5.6% 33.7%

The net demand for natural gas has increased by almost 8.5 % annually during FY03-
FY08, 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 FY11-
FY12. 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
FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10F

FY11F

FY12F

FY13F

FY14F

FY15F

FY16F

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

Page 10
CROSBY GAS DISTRIBUTION
OCTOBER 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.

Page 11
CROSBY GAS DISTRIBUTION
OCTOBER 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

70,000 SNGP 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).

Page 12
CROSBY GAS DISTRIBUTION
OCTOBER 23, 2009 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 admissible Expenditures

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 (III * IV)

VI Shortfall over Return required (E-V)

Page 13
 Key Financials of SNGPL CROSBY

P&L Statement - PKRmn FY08 FY09 FY10F FY11F FY12F Balance Sheet - PKRmn FY08 FY09 FY10F FY11F FY12F
Gross Sales 145,182 183,712 172,058 187,519 202,211 Cash and bank balances 8,137 1,317 939 118 (1,190)
OCTOBER 23, 2009

Sales Tax 21,777 22,997 22,442 24,459 26,375 Trade Debt 18,757 25,706 23,530 22,673 24,554
GDS (750) (8,219) 4,819 5,549 5,961 Stock in Trade 525 783 613 577 606
Net Sales 124,155 168,934 144,797 157,511 169,875 Stores & spare parts 2,287 2,172 2,397 2,637 2,901
Cost of gas sold 109,107 151,337 123,622 132,484 141,573 Other receivables 5,152 13,158 10,617 9,237 8,129
Gross Profit 15,048 17,596 21,176 25,028 28,301 Total Current Assets 34,859 43,137 38,721 35,242 34,999
Rental and Service Income 916 990 1,049 1,194 1,329 Assets 62,195 78,616 79,918 87,062 94,227
Amortization of Deferred Credit 790 1,096 983 1,120 1,120 Long term deposits and prepayments 364 355 355 355 355
Surcharge on Gas Sales Arrears 703 1,201 1,321 1,453 1,598 Investment in associate company 5 5 5 5 5
Dist. and Admin. Expenses 13,177 16,735 19,303 22,626 25,276 Long term loans 225 235 235 235 235
Other income 1,447 1,210 1,086 989 982 TOTAL ASSETS 97,648 122,348 119,234 122,899 129,820
Other Operating Expenses 957 2,975 1,488 1,636 1,800
EBIT 4,770 2,383 4,824 5,520 6,254 Short term borrowing - 951 1,046 1,151 1,266
Finance cost 789 653 735 827 1,192 Trade and other Payables 27,416 49,786 42,354 42,777 43,205
EBT 3,981 1,730 4,099 4,693 5,062 Interest Accrued 396 552 704 880 1,100
Taxation 1,485 800 1,517 1,737 1,873 Current portion of Long term financing 1,562 1,103 539 164 125
PAT 2,497 930 2,582 2,957 3,189 Current Liabilities 29,375 52,392 43,596 44,971 45,695
EPS 4.55 1.69 4.70 5.38 5.81 Long Term Financing 2,780 1,798 2,879 3,881 7,009
Deferred Liabilties 7,899 8,570 9,460 10,406 11,447
Security Deposits 9,068 11,440 10,898 11,875 12,912
Deferred Credit 31,387 32,000 32,000 32,000 32,000

Page 14
Total LT Liabilities 51,134 53,809 56,907 58,162 63,367
*As of Oct 31-208

Cash Flow Statement - PKRmn FY08 FY09 FY10F FY11F FY12F

CF From Operating Activities Total Liabilities 80,509 106,200 100,504 103,134 109,062
Net Income 2,497 930 2,582 2,957 3,189 Paid-up 5,491 5,491 5,491 5,491 5,491
Depreciation 4,942 5,898 6,746 7,481 8,283 Retained earnings 11,648 10,657 13,240 14,275 15,267
Working Capital Changes (2,370) 7,427 (2,618) 2,632 (417) Total Equity 17,139 16,148 18,731 19,766 20,758
Deferred Credit 8,278 613 - - - TOTAL EQUITY AND LIABILITIES 97,648 122,349 119,234 122,899 129,821
Operating Cash Flows 13,346 14,869 6,710 13,070 11,055
CF from Investing Activties
Capex (17,441) (22,310) (8,048) (14,625) (15,448)
Key Ratios FY08 FY09 FY10F FY11F FY12F
Investments (2) (10) - - -
Shares Outstanding - mn 549.105 549.105 549.105 549.105 549.105
Investing Cash Flows (17,443) (22,320) (8,048) (14,625) (15,448)
EPS 4.5 1.7 4.7 5.4 5.8
CF from Financing Activities
DPS 3.5 - 2.8 3.2 3.5
Deferred Liabilities 848 671 890 946 1,041
Gross margin 12.1% 10.4% 14.6% 15.9% 16.7%
Net Debt (514) 1,882 70 1,709 4,241
EBIT Margin 3.8% 1.4% 3.3% 3.5% 3.7%
Dividends (1,647) (1,921) - (1,922) (2,196)
Days in Payable 84 93 136 117 111
Equity Injection / Other flows to Equity - - - - -
Days in Receivable 44 44 52 45 43
Financing Cash Flows (1,313) 632 959 733 3,085
Total Asset Turnover 1.4 1.5 1.2 1.3 1.3
Net Cash flow (5,410) (6,820) (378) (821) (1,308)
Assets/Equity 5.7 7.6 6.4 6.2 6.3
Opening Cash Balance 13,546 8,137 1,317 939 118
ROE 15.3% 5.4% 16.0% 15.8% 16.1%
Ending Cash Balance 8,137 1,317 939 118 (1,190)
ROA 3.0% 1.0% 2.1% 2.5% 2.6%
ROCE 8.9% 3.2% 8.8% 9.1% 9.0%
Sui Northern Gas Pipelines Limited - Initiating Coverage
GAS DISTRIBUTION
CROSBY GAS DISTRIBUTION
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 rehan.uddin@crosby.com +92-21-35615855

Fatima Anis, ACA Deputy Head of Research Banks fatima.anis@crosby.com +92-21-35615856

Shahid Ali Research Analyst Refinery, Fertilizer & OMC shahid.ali@crosby.com Ext.543

Pershotam Lal Research Analyst E&P, Cement pershotam.lal@crosby.com Ext.544

Omair Iqbal Research Analyst Economy, Insurance & Autos omair.iqbal@crosby.com Ext.542

Madeeha Akhtar Research Analyst Gas Distribution, IPP madeeha.akhtar@crosby.com Ext.545

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Muhammad Irfan Naviwala muhammad.irfan@crosby.com +92-21-35615830

Faisal Kapadia faisal.kapadia@crosby.com +92-21-35615828

Sohail Shaikh sohail.shaikh@crosby.com +92-21-35615832

Naveed Ahmed naveed.ahmed@crosby.com +92-21-35615824

Muhammad Khurram muhammad.khurram@crosby.com +92-21-35615821

This report is prepared and published by:

Research Department

Crosby Securities Pakistan (Pvt.) Ltd

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M.T Khan Road, Karachi.
Pakistan

+92-21-35615861-66
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