Engro’s Fertilizer business reports a cash loss of PKR 10 Billion.

Karachi, February 15, 2013: The Board of Directors of Engro Corporation Limited today announced the financial results for the year ended December 31, 2012.

During the year, Engro faced an existential threat due to government default on its contractual obligations. Blatant discrimination of the government leading to continued gas curtailment to Engro Fertilizer resulted in a cash Shortfall of Rs. 10 billion and which impacted the profitability of Engro Corporation. The consolidated revenue of the Company stood at Rs. 125 billion compared to 115 billion in 2011, while net profit after tax was Rs. 1,333 million as compared to a net profit after tax of Rs. 8,060 million, a decrease of 83%, in the same period last year. The company announced an EPS of Rs. 2.61 for the year ended December 31, 2012 as opposed to the EPS of Rs. 15.77 in 2011.

The government and SNGPL’s blatant default on its contractual agreement to Engro’s USD 1.1b EnVen plant, resulted in gas supply of approximately 9 percent of its total allocated amount throughout 2012. The discriminatory policies of the government against Engro have also resulted in massive losses at the government level and led to acute food shortage. Urea sales have registered a decline of 12% to reach 5.2 million tons in the calendar year 2012, which is the steepest annual decline in recent history. Farmers have suffered extra burden of Rs. 53 billion due to higher urea prices on the back of continued gas curtailment to fertilizer plants whereas the national exchequer has also suffered since 2.2 million tons urea has been imported at a forex cost of $1.1 Billion and a subsidy of Rs. 57 billion (Jan 2011 -June 2012).

The agricultural sector, therefore, represents an alarming situation with the country now moving towards a significant food crisis. According to a recent study total cost of fertilizer input per acreage has witnessed a massive increase of 83% between 2008 and 2012, and has gone up from Rs. 4,450 per acre to Rs. 8,125 per acre for the average farmer. The issues in the input side of farmer economics is now resulting in decreasing crop yields which is evident by increase in commodity prices and rising inflation. If the situation persists and yields continue to decline a significant increase in food prices especially that of wheat and rice is expected. Consequently, the deficit of trade on food products – which stood at Rs. 750 million in 2012 – is likely to increase up to Rs. 1 billion in 2013.

Given that the country is in no state to further import international urea at expensive prices and further subsidize it, the need of the hour is to restore gas provision to the Engro fertilizer to sustain the agricultural sector of the country which contributes in excess of 21% to the economy’s GDP. In addition, government’s inability to keep its commitments has shattered investor confidence and reduced foreign direct investment which declined by 12% to USD 525 million during July 2012 to January 2013. This is further compounded by the fact that Engro Fertilizer remains a key private borrower and therefore, the Company’s inability to meet its financial obligations renders the entire banking sector at risk. Furthermore, the government needs to support farmers by bringing down input prices which will result in decreasing commodity prices and the benefit can then be passed on to the consumers.

Overall the company continues to engage with various stakeholders to ensure a sustainable solution to the persistent energy crisis. The performance of the various businesses of Engro is as under:

FERTILIZERS:
Overall the fertilizer business made a net loss after tax of Rs. 2,935 million for the year 2012 against a profit of Rs. 4,588 million for the year 2011.

The Company also managed to service debt of Rs. 13,645 million in 2012 (including interest of Rs. 8,726 m).

FOODS:
Engro Foods, on the contrary, continued its extraordinarily brilliant performance and reported a profit after tax of Rs. 2,595 million for the year ended December 31, 2012 as compared to Rs. 891 million in 2011. In addition, the Company’s investment in the Halal Foods business in Canada – Al Safa also achieved sizable sales revenue of Canadian $ 11 million during the year under review.

TRADING:
The Phosphates business managed by Engro Eximp, reported a loss after tax of PKR 43 million in FY 2012 as compared to a profit of PKR 1,530 million in the corresponding period in 2011.

Moreover, the rice business, managed by Engro Eximp Agriproducts (formerly known as Engro Foods Supply Chain), sold 39,000 tons of finished rice equivalent products in the local and export markets during year 2012. However, during paddy season starting in October 2012 the company purchased 128 k Tons of paddy and 2 k Tons of unfinished rice, highest ever procurement of paddy by a single entity in the history of Pakistan.

PETROCHEMICALS:
The petrochemicals business witnessed an increase in domestic PVC sales to 146 Ktons in the year 2012, as compared to 121 Ktons in 2011. The business posted a net profit of Rs. 77 million, compared to a loss of Rs. 706 million in 2011. The higher profitability was mainly attributable to increased volumes, higher caustic prices as compared to the same period last year, and insurance claim proceeds.

ENERGY:
During the year under review, the Engro Qadirpur Powergen plant dispatched a total of 1,766 GWh to the national grid and demonstrated a billable availability of 100.4%. The business declared a net profit of Rs. 2,035 million as compared to a profit of Rs. 1,718 in 2011.

Engro’s business interests in Liquefied Natural Gas (LNG) and Thar Coal project continued to face tremendous uncertainty concerning government’s contractual commitments. The Ministry of Finance turned down the demand for sovereign guarantees made for a loan of $3 billion that Sindh Engro Coal Mining Company (SECMC) is seeking from banks for developing Thar coal mining project. However, on the front of the Thar Coal Project, a key achievement made by the Company during the year was securing the landmark decision by the Prime Minister of Pakistan on Thar Coal project which entailed:

all conversion of existing oil-based power plants should be based on Thar Coal specification and new coal based power projects should also be designed on Thar Coal specification
coal off-take agreement between GENCO and SECMC for supply of coal for existing Jamshoro power plant as well as new 600 MW power plant at Jamshoro be finalized; and
sovereign guarantee for financing the debt portion of Thar Block II mining project amounting to USD 600-700 million shall be provided by the Government of Pakistan.

Although aforementioned decisions have not been implemented yet, however, SECMC together with TCEB and Government of Sindh (GoS) is actively pursuing the Coal Off-take Agreement with Ministry of Water & Power and issuance of Sovereign Guarantee with Ministry of Finance.

CHEMICAL STORAGE & HANDLING:
The chemical storage and handling business declared revenue of Rs. 2.376 billion as opposed to Rs. 2.286 billion in 2011. The profit after tax for 2012 was Rs. 1.488 billion

LNG:
With regards to the LNG interests of the Company, in November of 2012 a preliminary investment proposal was submitted to Vopak which was consequently approved. Later in December 2012, SSGCL invited Expression of Interest from existing terminal owners/ operators for delivering 200 mmscfd of RLNG on a tolling basis. The tolling fee structure would be based on capacity charge plus a throughput fee for a period of 2 years. EVTL has submitted an EOI and will participate in the tender in 2013 if the request for proposal is issued.