NEPRA announces decision on K Electric: better but still disappointing

NEPRA has announced its decision in the matter of ‘Motions for Leave for Review’ filed by K-Electric Limited (KEL). Our initial impressions of the decision are

(1) Cost-plus basis tariff has been maintained (vs. KEL’s demand for a performance based tariff),

(2) Tariff has been increased to Rs12.77/unit from Rs12.1/unit approved earlier,

(3) Allowable CAPEX has been increased to Rs299bn from earlier approved Rs238bn over a period of seven years.

The new tariff is better-than-previously-approved, however we believe it still falls short of KEL’s demands. While we expect the acquisition of KEL is still likely to go through, the pricing will be much-lower-than earlier expectations because of the tariff. We can also potentially see KEL challenging this decision in a higher court. We will update on this matter after going through the complete document.

Taking To the financial analysts at JS Global . this would be the financial impact on K Electric after applying such tarrif.

 

  • NEPRA has announced its decision in response to review petition filed by K-Electric (KEL) regarding revised Multi-Year Tariff (MYT) over FY17-23 released by the authority on Mar 20th, 2017.
  • NEPRA has maintained its original decision regarding KEL’s tariff structure at a cost plus based structure vis-a-vis performance based structure previously. The utility’s tariff will now incorporate a WACC-based return of 13.83% vs. 13.27% approved earlier.
  • The base tariff has now been reduced to Rs12.77/KWh. Though the revised tariff is lower than previously expired tariff of Rs15.6/KWh, it is positive than previous NEPRA determination of Rs12.1/KWh. We present the comparative salient features of the tariff recommended by KEL and announced by NEPRA in the table below.
  • Base tariff also allows a built-in CAPEX component of Rs299bn vs. earlier approved Rs238bn (investment over a period of 7 years) for which NEPRA has introduced a base rate adjustment component of Rs1.059/KWh vs. Rs0.55/KWh (originally announced), ensuring a WACC 13.83% on the company Regulatory Asset Base (RAB).
  • The revised tariff structure would continue to have a negative impact on the company’s bottom-line and is likely to be challenged by the company in the higher court.
  • We maintain our ‘Under Review’ stance on KEL. For further details, kindly refer to out report dated March 22, 2017, “Negative surprises in revised MYT place KEL ‘Under Review'”.

Source : JS Research

 

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