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 Pakistans 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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Strategic Management SSGC

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. Companys 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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Strategic Management SSGC

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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Strategic Management SSGC

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 Companys system. Consistent appreciation in shareholders value by increasing the companys 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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Strategic Management SSGC

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 Companys strategic plans and implemented the following projects: PPLs pipeline will be integrated with the Companys 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 Companys 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 18 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 12 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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Strategic Management SSGC

24 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. 16 diameter x 67 km Mehar Gas Field Integration Project at Thari Mohabat on IRBP will supply mcfd gas estimated project cost is Rs. 1,446 million with commissioning expected in 2011-12 6 diameter x 8 km pipeline for supplying 10 mmcfd gas to Kandra Power Company (Pvt) Limited Estimated 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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Strategic Management SSGC

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 107737 (-0.38%) 2009 108151 (44%) 2008 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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Strategic Management SSGC

COGS (Rs in Millions)

2010 104937 (-3.47%) 2009 108710 (57%) 2008 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 2800 (45%) 2009 (559) (-10%) 2008 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.

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Strategic Management SSGC

Net Profit (Rs in Millions)

2010 4899 (18%) 2009 257 (-7%) 2008 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 1.0 2009 1.05 2008 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
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Strategic Management SSGC

the current sales rate provides a Days Receivables Outstanding of 130.44. Last, Sui Southern Gas Co., Ltd. is 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 45:55 2009 64:86 2008 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 8.04 2009 8.10 2008 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 years 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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Strategic Management SSGC

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 2.95 2009 2.90 2008 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 2.49 2009 (0.54) 2008 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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Strategic Management SSGC

Net Profit Margin: 2010 0.92 2009 0.25 2008 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 11.90 2009 0.77 2008 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.

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Strategic Management SSGC

Return on Equity: 2010 81.26 2009 2.66 2008 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

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Strategic Management SSGC

Political conditions in country Political uncertainty in Baluchistan

Industry A competitor has a new, innovative product or service

Internal Environment:

Strengths:
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

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Strategic Management SSGC

EFE Matrix:
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 2 0.08

c. Positive stock market trends

0.06

0.12

d. Increase in population

0.08

0.24

e. Changes in lifestyle

0.06 0.05

2 4

0.12 0.2

f. Attitude towards customer service

Threats:
a. Changes in Government regulations 0.06 2 0.12

b. Political conditions in country

0.08

0.16

c. Political uncertainty in Baluchistan

0.06

0.18

d. A competitor has a new, innovative product or service

0.06 1.00

0.18

Total

3.2

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Strategic Management SSGC

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

0.08

0.24

c. Skilled workforce

0.06

0.18

d. Online bidding

0.05

0.2

e. Customer focused services

0.04 0.04 0.04 0.06

4 3 3 3

0.16 0.12 0.12 0.18

f. Bill payment options g. Responsive to social and environmental concerns h. Concern for employees

i. Availability of gas at economical price

0.08

0.32

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Strategic Management SSGC

Weaknesses:
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 SSGCs strong internal position

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Strategic Management SSGC

6) Generating Strategic Options through Matching Stage Matrices

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-O Positive 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.

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

3) Quick response required for

in increasing demand for gas.

problems.

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Strategic Management SSGC

Threats-T Changes in Government regulations Poor Political conditions in country Political uncertainty in Baluchistan Industry A competitor has a new, innovative product or service

ST Strategies
1) Business level decisions should be decentralized.

WT Strategies
1) Try to avoid and minimize impacts from external environment through

2) SSGC should go for winwin situation with its labor force.

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. Thats 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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Strategic Management SSGC

IFE Total Weighted Score

4.0

3.0

2.0

1.0

I
EFE Total Weighted Score
(3.5, 3.2)

II

III

3.0

IV
2.0

VI

VII
1.0

VIII

IX

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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Strategic Management SSGC

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

QSPM:
Strategic Alternative # 1 Key Factors Market Development Weights AS TAS Strategic Alternative # 2 Product Development AS TAS

Opportunities: 1. Consumption pattern in all three sector is increasing

0.45

1.8

0.9

2. Demand shift for different categories of products 0.04 2 0.08 3 0.12

3. Positive stock market trends

0.06

0.12

0.12

4. Increase in population

0.08

0.24

0.16

5. Changes in lifestyle

0.06 0.05

2 3

0.12 0.15

3 3

0.18 0.15

6. Attitude towards customer service Threats: 1. Changes in Government regulations

0.06

0.18

0.12

2. Political conditions in country

0.08

0.24

0.16

3. Political uncertainty in Baluchistan 0.06 2 0.12 0 0

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Strategic Management SSGC

4. A competitor has a new, innovative product or service Total

0.06 1.00

0.12

0.24

Strategic Alternative # 1 Key Factors Market Development Weights AS TAS

Strategic Alternative # 2 Product Development AS TAS

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

0.5

1.5

2. Strong financial position

0.08

0.24

0.32

3. Skilled workforce

0.06

0.18

0.24

4. Online bidding

0.05

0.1

0.15

5. Customer focused services

0.04 0.04 and 0.04 0.06 0.08

2 2 0 0 3

0.08 0.08 0 0 0.24

2 1 0 0 3

0.08 0.04 0 0 0.24

6. Bill payment options 7. Responsive to social environmental concerns 8. Concern for employees 9. Availability of gas at economical price Weakness: 10. Labor unions Total

0.05 1.00

0.1

0.1

6.19

4.82

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Strategic Management SSGC

Sum of TAS

Market Development

Product Development

6.19 Interpretation:

>

4.82

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 Companys 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 Companys 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 18 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. 12 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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Strategic Management SSGC

9) Projected financial Statement

Projected Income Statement Projected Year (2011) 118510.7 88883.025 29627.675 29627.675 11350.9 11350.9 3972.815 7378.085 Rs In Million

Sale COGS Gross Profit Operating Expenses Other Income Earnings before Taxes Interest & Tax Expenses Net Income

Prior Year (2010) 107737 104937 2800 8220 10319 7018 2614 4899

Remarks 10% Inc 75% of Sales 15% of Sales

Projected Balance Sheet Projected Year (2011) 7800.45 5150.4 12950.85 11602.8

Prior Year (2010)

Total Current Asset Total Fixed Assets Total Asset Liabilities Total Liabilities & Net Worth

6783 4292 11076 9669

Remarks 15% increase 12% Increase 20% Increase

11076

12950.85

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