K-Electric Faces Tariff Revisions Impacting Financial Outlook

Karachi: K-Electric (KEL), Pakistan’s sole privatized and publicly listed integrated Distribution Company, is set for a challenging financial period following a tariff revision by the National Electric Power Regulatory Authority (NEPRA). The regulator’s decision came after a review motion filed by the Ministry of Energy and other stakeholders, citing recent negotiations with private producers and comparable business models in Pakistan.

The revised tariffs are expected to push KEL back to losses, estimated at approximately Rs2.6-2.7 per share in the fiscal year 2024 and Rs2.0-2.2 per share in 2025.

In the distribution sector, KEL had initially been granted a 14% USD Return on Equity (ROE), converted to 25.6% in Pakistani rupees for FY24. The recent revision, however, allows for only a 14.47% Rs ROE with no USD adjustments for the next seven years. This change is projected to result in a Rs3-4 billion annual hit to the company’s distribution profits.

The transmission business also faces similar constraints, with the regulator lowering the allowed ROE from 12% USD to 15% Rs, also impacting profits by Rs3-4 billion per annum.

The generation business fares slightly better as the USD ROE of 14% is maintained, though the model has shifted to a hybrid take-and-pay system. Guaranteed mechanisms will continue only for 35% of total capacity, affecting the financial stability of KEL’s generation operations.

Further tightening is seen in the recovery tariff, reduced from 6.7% to 3.5%, posing an estimated annual loss of Rs15-16 billion for KEL. Transmission and distribution losses are also addressed, with the benchmark reduced from 14.58% to 9.55%, potentially impacting the company’s FY24 accounts by over Rs25 billion.

KEL’s earnings outlook is bleak, with anticipated losses unless generation tariffs are adjusted or other remedies are sought. The company is considering its options, including possible appeals to relevant authorities.