SSGC Report (Final)

Strategic Management

Report On

“Sui Southern Gas Company Limited”

Prepared By:

Hassan Mirza (2861)

Mohammad Kashif (1714)

Submitted To:

Mr. Tariq Kaleem

Dated: 9th January 2011

Strategic Management SSGC

BRIEF HISTORY

Sui Southern Gas Company Limited is Pakistan’s leading integrated gas companyformed on March 30,

1989 following a series of mergers of three pioneering companies, namely :

1. Sui Gas Transmission Company Limited

2. Karachi Gas Company Limited

3. Indus Gas Company Limited

Sui Gas Transmission Company Limited was formed in 1954 with the primary responsibility of gas

purification at the Sui field in Baluchistan and its transmission to the consumption centers at Karachi.

The two distribution companies: Karachi Gas Company and Indus Gas Company, set up in 1955 to

build and operate gas distribution systems in Karachi and Interior Sindh.

In 1985, these two distribution companies were merged to form Southern Gas Company Limited and

later, in 1989, Southern Gas Company Limited and Sui Gas Transmission Company Limited were

merged to form the Sui Southern Gas Company Limited

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1) INTRODUCTION

SSGC is the largest integrated natural gas transmission and distribution companies in Pakistan

Serving the entire Southern region of the country, comprising the provinces of Sindh and Balochistan.

It has exclusive distribution and sale license in the provinces of Sindh and Balochistan.

Company’s core business is to buy natural gas in bulk from E&P (exploration & production)

companies, transmit it to load centres over its high pressure transmission system, distribute and sell it to

its customers through its supply network.

The Company is also involved in certain activities related to the gas business, including the

manufacturing and sale of gas meters, and construction contracts for lying of pipelines.

The Company is listed on the Karachi, Lahore and Islamabad Stock Exchanges.

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2) ANALYSIS OF CURRENT STRATEGIC DIRECTION

Vision Statement:

“To be a model utility providing quality service by maintaining a

high level of ethical and professional standards and through

optimum use of resources”

Mission Statement:

“To meet the energy requirements of customers through reliable

environmental friendly and sustainable supply of natural gas,

while conducting company business professionally, efficiently,

ethically and with responsibility to all our stakeholders,

community and the nation”

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2.1 Long Term Objectives:

The Company is pursuing an ambitious five year development and expansion plan estimated at Rs 42.9 billion.

Key objectives of the strategic plan for the next five years (2005-06 to 2009-10) are the following:

Expansion of transmission network by 608 kms from 2,942 km in 2005 to 3,550 km by 2010,

enhancing capacity from 1,300 MMCFD in 2005 to 1,700 MMCFD by 2010.

Expansion of distribution network and supply mains by 5,236 km from 25,764 km in 2005 to 31,000

km by 2010 connecting 600 new towns and villages in Sindh and Balochistan

Enhancement of gas supply to power plants, industrial and commercial sectors including supply of gas

to previously deprived areas in the domestic sector.

Increase of the customer base from nearly 1.8 million to 2.2 million by adding 447,000 new customers

to the Company’s system.

Consistent appreciation in shareholder’s value by increasing the company’s asset base and significant

improvement in productivity and efficiency.

Focus on improved, friendly and efficient customer services under the vision of “Service with a

smile”;

Establishment of 16 fully automated (additional 8 in progress) on line customer facilitation centers;

Multiple bill payment options and channels (ATM, Call Centers, ORIX POS, Internet, Drop Boxes,

NADRA-Kiosk)

Latest technology digital prepaid meters with improvement of call centers to include an online

customer information system.

Revamp the current business processes, to improve company efficiency and implement ERP, CIS, GIS

and the best business policies for ISO 9000 certification.

Increase surveillance and introduce an automated emergency response system (ERS) and SCADA for

the security of company assets including the transmission and distribution networks;

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Improve the quality of human resource through career planning, training of employees and

development of management.

Implement environment management system, occupational health and safety system as required under

Certification ISO 14001 and OHSAS 18001 standards;

Set up Enterprise Information System (EIS) in all areas of business using state of the art technology to

make SSGC the “Most IT Enabled Company;”

Human resource development and empowerment of employees through career planning and continuous

management/vocational training.

Community support services and corporate communication initiatives to meet the national and social

responsibilities, as a good corporate citizen.

The Planning and Development (P&D) Department kept pace with the Company’s strategic plans and implemented the following projects:

PPLs pipeline will be integrated with the Company’s ILBP system at up-stream of Tando Adam Valve Assembly for transportation of 15 mmcfd gas from PPLs Adam X-1 Field (Hala Block) at a cost of Rs. 48 million.

Tie-in arrangement shall be performed on the Company’s IRBP system at Shikarpur and installed in April 2010-11 at a cost of Rs. 28 million for receiving 28 mmcfd gases from Haseeb Field.

Replacement of Kadanwari pipeline overhead crossing will be carried out at Nara Canal with submerge Crossing at a cost of Rs. 22 million.

Installations of three LPG Air-Mix Plants will be carried out at Noshki and Surab (Baluchistan) and Kot Ghulam Muhammad (Sindh) each having a flow capacity of 100 mmbtu/hr at a total cost of Rs. 1,228 million.

Each plant is serving nearly 2,500 customers Projects under implementation 18Δ diameter x 18 km Dahdar-Ghokart segment on Quetta Pipeline (QPL) will enhance QPL capacity by 36 mmscfd to 149 mmcfd to meet increasing loads in Baluchistan.

Estimated project cost of Rs. 692 million with commissioning expected by December 201012Δ diameter x 64 km Zarghun-Quetta pipeline in Baluchistan will supply 25 mmcfd gas Estimated project cost is Rs.1,211 million with commissioning expected in 2011-12.

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24Δ diameter x 35 km Kunnar/Pashaki pipeline in Sindh will supply 313 mmcfd gas Estimated project cost is Rs. 1,492 million with commissioning expected by June 2012.

16Δ diameter x 67 km Mehar Gas Field Integration Project at Thari Mohabat on IRBP will supplymcfd gas estimated project cost is Rs. 1,446 million with commissioning expected in 2011-12

6Δ diameter x 8 km pipeline for supplying 10 mmcfd gas to Kandra Power Company (Pvt) LimitedEstimated project cost is Rs. 165 million with commissioning expected in 2011-12.

2.2) Current Strategies

Corporate Level Strategies:

The Company has been endeavoring to replace the old distribution network, enhance measurement accuracy and improve utilization efficiency by the end of 2010.

In this regard, the Company has been initially offered a loan of US $ 115 million by the World Bank, out of which US$ 105 million has been earmarked for gas pipeline and affiliated Infrastructure improvement and US$ 10 million for appliance efficiency pilot project.

The funding will be effectively used in outsourcing component pipeline replacement of approximately 3,350 kilometers while undertaking affiliated tasks such as cathode protection, pressure management, overhead leakage rectification, smart metering and prevention of gas theft.

Business Level Strategies:

For the following major Industrial, commercial & domestic competitors

Major Industrial Competitor:

1. Diesel

Major Commercial Competitor:

1. Diesel

2. Petrol

3. LPG

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Major Domestic Competitor:

1. LPG

2. Kerosene Oil

The competitive strategy adopted by SSGC is the Cost leadership. As SSGC is producing gas which is a

standardize product catering the needs of mass market i-e the south region of Pakistan by offering gas at

best price value to its customers.

Growth Strategy:

Market Development---SSGC is expanding the distribution of gas in the untapped areas of Province of

Sindh and Baluchistan.

Product Development---SSGC is also developing new products like CNG.

3) ANALYSIS OF CURRENT PERFORMANCE

Sales (Rs in Millions)

2010 2009 2008

107737 (-0.38%) 108151 (44%) 74626 (11.3%)

Interpretation:

Year over year, Sui Southern Gas Co., Ltd. has seen revenues remain relatively flat (108.2B to 107.7B), though the company was able to grow net income from 257.5M to 4.4B. A reduction in the percentage of sales devoted to cost of goods sold from 100.47% to 97.36% was a key component in the bottom line growth in the face of flat revenues.

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COGS (Rs in Millions)

2010 2009 2008

104937 (-3.47%) 108710 (57%) 69238 (9.63%)

Interpretation:

COGS shows a significant increase from 2008 to 2009 and 2010 due to enormous increase in the prices of raw

materials, FOH and labor wages.

Gross Profit (Rs in Millions)

2010 2009 2008

2800 (45%) (559) (-10%) 5387 (39%)

Interpretation:

As a result of high COGS, the gross profit declined from 2008 to 2009 as shown above which was later

recovered in the year 2010.

Net Profit (Rs in Millions)

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2010 2009 2008

4899 (18%) 257 (-7%) 991 (24%)

Interpretation:

Apart from the reason of an increase in the COGS, the operating expenses also caused a decline in the net

income of SSGC which was improved in the year 2010 by 18%.

4) FINANCIAL ANALYSIS

Liquidity Ratio

Current Ratio:

2010 2009 2008

1.0 1.05 1.08

Interpretation:

The Government of Pakistan (GoP) guarantees full performance of SSGC's payment obligation in all GSPAs with multinational E&P companies in the year 2009, which is around Rs 7 billion per month. Continuing circular debt issue is leading to major payment default by KESC, Wapda, SNGPL and blocked sales tax refund. This, in turn, has put SSGC in severe liquidity crisis and, as a result, SSGC has been defaulting in making timely payments to the public sector E&P companies (OGDCL, PPL, Orient Petroleum, SNGPL, OMV Pak Exploration, Eni Pakistan Ltd, British Petroleum and Government Public Holding Limited). SSGC's receivables have now reached staggering levels at Rs. 21.6. Along with the fact that SSGC is severely restrained by its capital expenditure, the burgeoning receivables' position has threatened the gas utility's very survival unless KESC starts paying up its dues on a regular and consistent basis. , There are not enough liquid assets to satisfy current obligations. Cash Collection is a strong suit as the company is more effective than most in the industry. As of the end of 2010, its uncollected receivables totaled 44.1B, which, at the current sales rate provides a Days Receivables Outstanding of 130.44. Last, Sui Southern Gas Co., Ltd. is

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among the least efficient in its industry at managing inventories, with 8.66 days of its Cost of Goods Sold tied up in Inventories.

Leverage Ratio

Debt to Equity Ratio:

2010 2009 2008

45:55 64:86 60:40

Interpretation:

Although debt as a percent of total capital decreased at Sui Southern Gas Co., Ltd. over the last

fiscal year to 59.18%, it is still in-line with the Gas Utilities industry's norm.

Activity Ratio

Fixed Asset Turnover:

2010 2009 2008

8.04 8.10 2.57

Interpretation:

This year, the Company achieved the capitalization at Rs. 5.4 billion against Rs. 7.6 billion last year. The

capital expenditure was mainly focused towards enhancing existing transmission and distribution network

besides rehabilitating and replacing the ageing network. During the year 2,503 km additional distribution

network was laid as compared to last year»s 2,352 km, an increase of 6%. This included 1,393 km laid in new

towns and villages of Sindh and Balochistan versus 912 km last year. 369 new towns and villages in Sindh and

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Balochistan were connected on gas this year as compared to 300 new towns and villages last year. Also 517

km old distribution network was replaced as compared to 483 km last year.

Total Asset Turnover:

2010 2009 2008

2.95 2.90 2.40

Interpretation:

Total asset turnover shows a consistent and stable increasing trend from 2008 to 2010 as shown above. It is due

to the face that these assets are properly utilized without any waste and they are maintained appropriately.

Profitability Ratios

Gross Profit Margin:

2010 2009 2008

2.49 (0.54) 7.18

Interpretation:

As a result of high COGS, the gross profit declined from 2008 to 2009 as shown above which was later

recovered in the year 2010.

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Net Profit Margin:

2010 2009 2008

0.92 0.25 1.82

Interpretation:

Apart from the reason of an increase in the COGS, the operating expenses also caused a decline in the net

income of SSGC which was improved in the year 2010 by 18%.

Return on Total Asset:

2010 2009 2008

11.90 0.77 8.40

Interpretation:

In 2009, the return on asset turnover declined because of a sudden price hike in general market as well as of

raw materials. Apart from that, overall return shows continuous improvement right from 2002.

Return on Equity:

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2010 2009 2008

81.26 2.66 9.61

Interpretation:

Financial charges which are also not allowed in tariff regime are close to last year position. Financial charges

on loans and overdraft are lower than the previous year and Company also deferred long term loan of Rs. 10

billion provided in the budget for the FY 2009-10 because of liquidity crisis in the financial market and high

cost of borrowing.

5) ANALYSIS OF EXTERNAL AND INTERNAL ENVIRONMENT

External Environment:

Opportunities:

General

Positive stock market trends Increase in population Changes in lifestyle

Industry

Consumption pattern in all three sector is increasing. Demand shift for different categories of products.

Company

Attitude towards customer service

Threats

General

Changes in Government regulations Political conditions in country Political uncertainty in Baluchistan

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Industry A competitor has a new, innovative product or service

Internal Environment:

Strength s:

Monopoly in transmission & distribution of gas in Sindh & Baluchistan provinces

Strong financial position

Skilled workforce

Online bidding

Bill payment options

Customer focused services

Responsive to social and environmental concerns

Concern for employees

Availability of gas at economical price

Weakness:

Labor unions Centralized decisions cause delay in action plans

EFE Matrix:

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Key External Factors Weights Rating Weighted Score

Opportunities:

a. Consumption pattern in all three sector is

increasing 0.45 4 1.8

b. Demand shift for different categories of

products 0.04 20.08

c. Positive stock market trends0.06 2

0.12

d. Increase in population0.08 3

0.24

e. Changes in lifestyle0.06 2

0.12

f. Attitude towards customer service 0.05 40.2

Threats:

a. Changes in Government regulations0.06 2

0.12

b. Political conditions in country0.08 2

0.16

c. Political uncertainty in Baluchistan0.06 3

0.18

d. A competitor has a new, innovative product

or service0.06 3

0.18

Total 1.00 3.2

Interpretation:

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The total weighted score of SSGC calculated through EFE Matrix is 3.2 which is above average indicates that

SSGC’s strategies effectively take advantage of existing opportunities and minimize the potential adverse

effects of external threats.

IFE Matrix:

Key External Factors Weights Rating Weighted Score

Strengths:

a. Monopoly in transmission & distribution of

gas in Sindh & Baluchistan provinces 0.5 4 2

b. Strong financial position0.08 3

0.24

c. Skilled workforce0.06 3

0.18

d. Online bidding0.05 4

0.2

e. Customer focused services0.04 4

0.16

f. Bill payment options0.04 3

0.12

g. Responsive to social and environmental concerns 0.04 3

0.12

h. Concern for employees 0.06 30.18

i. Availability of gas at economical price 0.08 40.32

Weaknesses:

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a. Labor unions

0.05 1

0.05

Total 1.00 3.57

Interpretation:

The total weighted score of SSGC calculated through IFE Matrix is 3.57 which is above average indicates that

SSGC’s strong internal position

6) Generating Strategic Options through Matching Stage Matrices

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SWOT MATRIX

Strengths-S

1)Monopoly in transmission & distribution of gas in Sindh & Baluchistan provinces.

2) Strong financial position.

3) Skilled workforce.

4) Online bidding.

5) Bill payment options.

6) Customer focused services.

7) Responsive to social and environmental concerns.

8) Concern for employees Availability of gas at economical price.

Weakness-W

1) Labor unions

2) Centralized decisions cause delay in action plans

Opportunities-OPositive stock market trends

Increase in population

Changes in lifestyle

Consumption pattern in all three sector is increasing.

Demand shift for different categories of products.

Company attitude towards customer service

SO- Strategies

1) Strong financial position can result in positive stock market value.

2) Monopoly can provide greater profits with an increase in population.

3) Quick response required for in increasing demand for gas.

WO Strategies

1) SSGC should go for win-win

situation with its labor force.

2) Increase consumption of gas

can be taken as an advantage

to solve all internal

problems.

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Threats-TChanges in Government regulations

Poor Political conditions in country

Political uncertainty in BaluchistanIndustry

A competitor has a new, innovative product or service

ST Strategies

1) Business level decisions

should be decentralized.

2) SSGC should go for win-

win situation with its labor

force.

WT Strategies

1) Try to avoid and minimize

impacts from external

environment through

corporate decisions.

CPM Matrix:

SSGC has monopoly in South region of Pakistan and therefore it does not face any direct competition with its

core product i-e gas in industry. That’s why CPM Matrix for SSGC cannot be developed.

BCG Matrix:

The BCG Matrix for SSGC cannot be constructed because it does not operate in more than one industry.

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IFE Total Weighted Score


Interpretation:

Through IE Matrix we can conclude that SSGC falls in cell-I and the strategies that suits best to this

cell include the Grow and Build Strategies which can be classify as:

o Integration strategies

o Market development

o Product development

o Market penetration

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4.0 3.0 2.0 1.0

EFE Total Weighted

Score

3.0

2.0

1.0

(3.5, 3.2)

III III

IV V VI

VII VIII IX


7) Strategic Option Chosen With The Help Of Decision Stage Matrix (QSPM)

QSPM:

Key Factors

Strategic Alternative # 1 Strategic Alternative # 2

Market Development Product Development

Weights AS TAS AS TASOpportunities:

1. Consumption pattern in all three

sector is increasing 0.45 41.8

20.9

2. Demand shift for different

categories of products 0.04 20.08

30.12

3. Positive stock market trends0.06 2

0.122

0.12

4. Increase in population0.08 3

0.242

0.16

5. Changes in lifestyle0.06 2

0.123

0.18

6. Attitude towards customer service 0.05 30.15

30.15

Threats:

1. Changes in Government

regulations 0.06 30.18

20.12

2. Political conditions in country0.08 3

0.242

0.16

3. Political uncertainty in

Baluchistan 0.06 20.12

00

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4. A competitor has a new,

innovative product or service0.06 2

0.124

0.24

Total 1.00

Key Factors

Strategic Alternative # 1 Strategic Alternative # 2

Market Development Product Development

Weights AS TAS AS TASStrengths:

1. Monopoly in transmission &

distribution of gas in Sindh &

Baluchistan provinces0.5 4

23

1.5

2. Strong financial position0.08 3

0.244

0.32

3. Skilled workforce0.06 3

0.184

0.24

4. Online bidding0.05 2

0.13

0.15

5. Customer focused services0.04 2

0.082

0.08

6. Bill payment options0.04 2

0.081

0.04

7. Responsive to social and environmental concerns 0.04 0

00

0

8. Concern for employees 0.06 00

00

9. Availability of gas at economical price 0.08 3

0.243

0.24

Weakness:

10. Labor unions0.05 2

0.12

0.1

Total 1.00 6.19 4.82

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Sum of TAS Market Development Product Development

6.19 > 4.82

Interpretation:

The market development strategy yields higher score than product development strategy. The market

development strategy has a score of 6.19 in the QSPM shown above whereas the product development strategy

has a smaller score of 4.82.

8) Action Plan For The Implement The Strategy

PPLs pipeline will be integrated with the Company’s ILBP system at up-stream of Tando Adam Valve Assembly for transportation of 15 mmcfd gas from PPLs Adam X-1 Field (Hala Block) at a cost of Rs. 48 million.

Tie-in arrangement shall be performed on the Company’s IRBP system at Shikarpur and installed in April 2010-11 at a cost of Rs. 28 million for receiving 28 mmcfd gases from Haseeb Field.

Replacement of Kadanwari pipeline overhead crossing will be carried out at Nara Canal with submerge Crossing at a cost of Rs. 22 million.

Installations of three LPG Air-Mix Plants will be carried out at Noshki and Surab (Baluchistan) and Kot Ghulam Muhammad (Sindh) each having a flow capacity of 100 mmbtu/hr at a total cost of Rs. 1,228 million.

Each plant is serving nearly 2,500 customers Projects under implementation 18Δ diameter x 18 km Dahdar-Ghokart segment on Quetta Pipeline (QPL) will enhance QPL capacity by 36 mmscfd to 149 mmcfd to meet increasing loads in Baluchistan.

Estimated project cost of Rs. 692 million with commissioning expected by December 2010. 12Δ diameter x 64 km Zarghun-Quetta pipeline in Baluchistan will supply 25 mmcfd gas Estimated project cost is Rs.1,211 million with commissioning expected in 2011-12.

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9) Projected financial Statement

Projected Income Statement

Rs In Million

Prior Year (2010)Projected Year (2011) Remarks

Sale 107737 118510.7 10% Inc

COGS 10493788883.02

575% of Sales

Gross Profit 280029627.67

5

Operating Expenses 822029627.67

515% of Sales

Other Income 10319 11350.9 Earnings before Taxes 7018 11350.9 Interest & Tax Expenses 2614 3972.815 Net Income 4899 7378.085

Projected Balance Sheet

Prior Year (2010)Projected Year (2011) Remarks

Total Current Asset 6783 7800.4515% increase

Total Fixed Assets 4292 5150.412% Increase

Total Asset 11076 12950.85

Liabilities 9669 11602.820% Increase

Total Liabilities & Net Worth 11076 12950.85

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