K-Electric (KE) has been a great case study in Pakistan's recent corporate history. It promises to continue to be an intriguing case study in the future. All for the wrong reasons, if you are a KE shareholder, or just a stakeholder. Cutting it short, KE does not like the revised Nepra tariff, fears it will send it into a financial mess, and believes will shoo away Shanghai Electric.
Now you have seen that all before. Only that it makes KE's case a touch more difficult, and narrows the options in hand. With the review petition handing KE a mere 75 paisas per unit on tariff, as against Rs3 per unit demanded, KE is likely to be footing hefty legal charges bills.
Without going into the merits of Nepra's decision on the review petition, if things stay as they are, it spells some serious trouble for KE. Recall that Nepra has now modified the adjustment mechanism to eliminate features of performance based regulations. KE sells around 12 billion units per annum, and stands to lose a staggering Rs45 billion in topline, under the revised tariff.
To put it in perspective, KE could have a freefall from an after tax profit in excess of Rs24 billion in 2016 to Rs4 billion in losses in 2017. That is some fall, and KE has worked it ahead till the completion of the revised MYT in 2023, and forecasts losses to reach Rs26 billion. What this means is KE would struggle to invest in efficiency, because the tariff no more allows fair returns.
When the efficiency gains are not allowed to be retained, it cripples the return and plays havoc with the cash flow cycle. KE has planned an investment of a significant $2.5 billion, most of which is meant for transmission and distribution. Needless to say, with cash flows in red, these investments would not be made.
For no investments in the system, read more load shedding. It promises to concede with the rest of Pakistan being load shedding free. KE foresees supply growth to cripple in this case, and the load shedding to extend to as much as 8 hours a day by 2021. Circular debt, given such a cash flow forecast, also says hello.
It takes no more than common sense that Shanghai Electric would rather stay away from a company that promises to make billions, for years, in losses. Even if Shanghai Electric were to invest half of what it promised, that is more than $4.5 billion in FDI.
Nepra may well have reasonable grounds to nearly stick to its previous decisions. KE may have its own. There is consensus that the outcome is far from desirable. Karachi cannot afford to be in the dark. Pakistan can ill afford to let go of a reputable Chinese investor with billions promised in FDI. If KE has sound grounds to convince the authorities, it must happen. Surely, integrated power utility company must not be advertised as a loss making proposition.
(Read this space for more on the issue later this week)
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