KEL in a pickle

K Electric Limited (PSX: KEL) stock has been tumbling since March 2017 solely because of how its Multi-Year Tariff (MYT) revision has panned out. First a brief background to the recent changes of event.

In March this year, NEPRA notified a new MYT for K-Electric Limited. The utility had originally sought MYT at Rs16.1 per Kwh for a period of ten years, whereas the regulator came forth with some major alterations in the tariff structure including a seven-year period as against the ten-year period requested.

Despite some increases in allowances and benchmarks like increasing the T&D benchmark and allowing the pass through of O&M costs and write-offs, the bone of contention between the regulator and the power utility was the base tariff; the regulator did just the opposite by significantly revising the base tariff down to around Rs12 per Kwh versus the existing Rs15 per Kwh, which according to KEL was expected to negatively affect its earnings going forward. Dissatisfied, KEL decided to file a review petition to which the regulator held a review hearing earlier in July 2017.

The market hoped little from the review petition because of the omnipresent tussle between KEL and the regulator, and NEPRA’s much-awaited decision on KEL’s MYT review petition announced recently has been a dampener just as expected.

Against the earlier announced base tariff of Rs12.07 per Kwh, NEPRA has increased the tariff to Rs12.77 per Kwh this time. The decision has put KEL in a dicey situation as the increase is peanuts in front of the FY16 tariff and the one proposed by KEL, despite the regulator’s upward revision. As a result, KEL’s scrip came under severe selling pressure the day of the announcement, contributing the maximum to the day’s volumes.

So what from here? While KEL can contest this decision in legal courts, one can see that under the revised tariff, the power utility will have a tough time in keeping up its profitability trend. Moreover, it will hinder KEL in executing its investment plans that it must have made under at least the existing base tariff.

A small increase in tariff along with some stringent target and benchmarks will not leave KEL satisfied. The revised tariff has also seen an upward revision in Clawback threshold for profit sharing in the earlier years of the seven-year period, which will also render punitive for the utility. And lastly, the tariff determination might eventually jeopardize KEL’s sale to Shanghai Electric, which has been waiting eagerly for the decision too.