K-Electric (KE) share price is down 8 percent in five trading sessions, ever since National Electric Power Regulatory Authority (Nepra) announced the multiyear tariff determination for KE. The market has by and large understood as a negative, primarily stemming from KEâ€™s own reading of the tariff determination. On another level, the fear that Chinese investors would not be too happy over the development, has reportedly caused a high level meeting being formed upon the PMâ€™s direction.
In all fairness, Nepraâ€™s tariff determination document is a lengthy and detailed one, and it is difficult to pick a winner or loser. The stock marketâ€™s overriding negative reaction hints that it is net negative for the integrated power giant. A careful look at the document, however, indicates it is not a lost cause at all for KE, as much as it would want it to be portrayed as such.
Recall that KE had requested for the continuation of the existing tariff regime for another ten years, upon expiry in 2016. It had also requested the authority to revise the profit claw back threshold, in addition to seeking an additional Rs0.66/kwh in the O&M component of the tariff. A working capital allowance was also sought to cover up for the payment delays on account of tariff differential claims.
The revised base tariff for KE now stands at Rs12.06/kwh, applicable from July 2016. This should not be confused with the end consumer tariff, as there is a uniform across the country tariff, the differential of which is paid by the government thorough subsidies. All things constant, such a steep downward revision in tariffs would mean less inter disco tariff differential subsidy. This should help KE manage its cash flows better, as it has long complained of delays in subsidy payments from the government.
Nepra has also ensured KE an overall 13.27% WACC over the control period, and a base readjustment component of Rs0.55/kwh has been introduced in the tariff. Furthermore, Nepra has also decided to revise the claw back threshold on year to year basis, starting from 16.75 percent in the first year to 13.15 percent in the last year. Recall that claw back threshold was set at a minimum of 12 percent earlier, and addresses one of KEâ€™s big concerns of not being able to generate comparable returns.
Another area where KE has been given some berating space is the addition of margin for law and order in the T&D allowance. Should the existing tariff continue, KE would be allowed no more than 15 percent in terms of T&D losses. But the same has now been increased to 20.4 percent, after the addition of 5.2 percent on account of law and order margin. KE should definitely not feel that aggrieved as the allowed T&D target does not go under 15 percent till 2020-21.
There are areas such as auxiliary consumption, heat rates, allowance for bad debts and revised definition of EBIT, which have not gone KEâ€™s way. But it should not be blown up to the level that such a decision will put the Chinese investment at risk. Mind you, the investors when weighing KE, surely must have known that the existing tariff will be revised.
KEâ€™s operational and financial performance improvement has been acknowledged time and again. And with the capital expenditure plan laid out, it seems well on track to continue its journey, even with the revised multiyear tariff. All said, KE is all set to file a review petition and things are expected to go in litigation.