Companies operating in the energy sector -- whether in exploration, development and production, or in transmission, distribution and marketing - are rewarded with guaranteed rates of return.
These entities are entitled to assured minimum returns: their earnings before interest and taxation (EBIT) are a pre-determined percentage either of equity, or of net fixed assets in operation.
The resultant earnings available for distribution among shareholders are determined after the deduction from such guaranteed EBIT of financial charges and taxation. Not surprisingly, in times such as now, of falling borrowing costs and rates of corporate taxation, energy companies' shareholders continue to reap a bonanza of windfall earnings.
However managements of the two leading companies -- Sui Northern Gas Pipelines Limited (SNGPL) and Sui Southern Gas Company Limited (SSGCL) - have in respect of the year ended 30 June 2004, inexplicably and apparently willingly, settled for less than the minimum guaranteed return that is their lawful right, and to which moreover they are fully entitled.
Auditors of SSGCL conclude their report to the shareholders thus: "Without qualifying our opinion, we draw attention to note 2.13 to the financial statements which explains the provisions of an agreement with Asian Development Bank for a loan, under which the company is required to earn a minimum annual return before taxation of 17 per cent per annum (sic) on the net average operating fixed assets for the year, excluding financial and other non-operating charges and non-operating income. During the year ended June 30, 2004, the company's return before taxation was less than minimum required return."
An explanation of sorts is provided by the management on page 47 of the Report under the heading "Regulatory Environment Enactments - Paving the way for Regulation." Shareholders are assured that "the company is diligently following the regulatory regime determined by OGRA," and that "revenue and tariff petitions are being submitted in a timely manner."
However for the year ended June 30, 2004, OGRA allowed the company total revenue of only "Rs46,364 million against Rs46,857 million claimed by the company i.e. a reduction of Rs493 million." The management has clarified that the cutback has been on account of the following dis allowances by OGRA:
The items listed add up to more than the Rs493 million mentioned as disallowed in the annual report. Shareholders are nevertheless reassured that the "company has reservations on these dis allowances, and is preparing to file a motion for review against the decision of the OGRA."
However despite the planned review petition, and regrettably in direct contravention, of the Company's declared accounting policy concerning 'revenue recognition', which states categorically that "income earned...... short of the..... guaranteed return is..... recoverable from GOP," the disputed revenue of Rs493 (or Rs528) million has not been incorporated in income for the year 2003-04.
Why then if the revenue shortfall is recoverable from the government as determined herein, has it not been incorporated in the 2003-04 income and shown as a receivable? Why has the management not staked a claim to the revenue shortfall, in the year to which it relates, by accruing the revenue and providing for it as receivable in respect of the year 2003-04?
When and if OGRA dismisses the petition as untenable, wholly or partially, necessary write-offs could be made. But why concede defeat without putting up a fight, especially when a loan covenant made by GOP with the ADB supports the company's claim? Is there a hidden agenda behind this, namely to soften up shareholders into accepting a scenario where minimum guaranteed returns are no longer a certainty? Is this why the share price of SSGCL has stagnated around Rs26, at a time when the KSE share index is scaling unprecedented heights on the back of an upsurge largely in energy sector shares?
The auditors of SNGPL have also drawn the attention of shareholders to the situation where "during the year ended June 30, 2004, the company's return....... was less than minimum required return."
However unlike SSGCL, the SNGPL report carries no information whatsoever on the amount of the shortfall, the factors responsible for it and whether there are any plans to secure recovery of the shortfall from the government or OGRA.
Short-changing the shareholders and keeping them in the dark about it is something definitely frowned upon by the authors and monitors of the Corporate Code of Good Governance!
In the annual general meeting of SNGPL held after a delay of two months in end-December, shareholders invited the management's views on the auditor's observation. They were informed that the shortfall was in the region of Rs500 million, or about Re1 per share, and that a review petition to OGRA was under submission.
However no convincing or persuasive explanation was offered by the management for the exclusion, from revenues, of the rightfully and legally due amount, to an assembly of shareholders that was getting increasingly restive over being deprived of earnings of Re1 per share.
(million rupees)
Penalty recovered from gas supplier disallowed as non-operating income by OGRA
