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State governments resolve to bring down SEB losses
Positive for power financiers; Buy PFC and REC
In a conference on "Distribution Sector Reforms", state governments have
unanimously resolved to bring down commercial losses and ensure
financial sustainability of DISCOMs.
They intend to implement concrete measures like computerization of
accounts, annual tariff petition filing/tariff revisions, and conversion of
loans into perpetual bonds/equity, among others.
We believe this is a positive development for power financiers, and
reiterate our Buy rating on PFC and REC.
Positive development for power financiers
PFC and REC have corrected ~45% from the peak amidst concerns relating to the
deteriorating financial health of SEBs. In this backdrop, media reports of possible
restructuring of the Madhya Pradesh SEB loans from the state government and
developments in the recent conference on "Distribution Sector Reforms" are enthusing.
At the conference, the state governments unanimously resolved to bring down
commercial losses and ensure financial sustainability of DISCOMs. (We have presented
the details on page 2). This is positive for power financiers like PFC, which has 65%
exposure to SEBs, and REC, which has 83% exposure to SEBs.
SEB financials alarming, but the worst seems to be behind
In an Update, "Just an Eclipse…Brighter Days Ahead" (dated June 2011), our Utilities
team had opined that FY11 would be the peak of SEB losses. With decline in ST
power cost and improvement in availability of LT power, there would be a reduction in
SEBs' power purchase cost. This combined with gradual tariff increase would lead to
an improvement in SEB finances.
Post their meetings with Tamil Nadu State Electricity Regulatory Commission (TNERC)
and Tamil Nadu Generation and Distribution Company (TANGEDCO), they have come
away reassured about impending improvement in TANGEDCO's financials. They have
noted that there is a concrete roadmap to achieve financial viability for TANGEDCO
and a clear consensus amidst authorities on restoring the financial health of the
power sector.
Reiterate our positive view on PFC and REC
PFC (see our Detailed Report dated 9 May 2011) and REC (see our Detailed Report
dated 25 May 2011) are our preferred bets to play the theme of 'improvement in SEB
finances'. These companies either have an escrow mechanism or state government
guarantees for a large part of their funding to SEBs. Valuations are attractive. We
reiterate Buy on PFC/REC with a target price INR290/INR310.
Conference on "Distribution Sector Reforms": Highlights
In the State Power Ministers' Conference on "Distribution Sector Reforms", the state
governments/Planning Commission/Ministry of Power underlined the need for urgent steps
to arrest and reverse the growing losses in power distribution. Chaired by Union Minister
of Power, Mr Sushil Kumar Shinde, the Conference brought together State Power Ministers
from across the country.
The Conference emphasized that the target of bringing down distribution losses to 15% is
achievable if the states devise a utility-wise turnaround plan and closely monitor it at the
highest level. In their respective presentations, the states highlighted the administrative
and financial measures taken by them to address the issue of electricity pilferage.
Key takeaways from the Power Ministry's press release
The state governments would ensure that the accounts of the utilities are audited up to
the year 2009-10 and also ensure that the accounts of a financial year are audited by
September of the next financial year, henceforth. Computerization of accounts would
be undertaken on priority, if not done already.
The states would ensure that the distribution utilities file their Annual Tariff Revision
Petition every year by December/January of the preceding financial year with the
State Regulators as stipulated by the National Tariff Policy.
The Annual Tariff Revision Petition would be filed before the SERC, keeping in view
the increase in power purchase cost (which accounts for 70-80% of the cost of supply)
and states would ensure that the difference between ARR and ACS is not only bridged
but is positive to generate internal surpluses, which can be used for network expansion
and maintenance.
The state governments would ensure automatic pass-through in tariff for any increase
in fuel cost by incorporating the same in the regulations, as provided in Section 62(4)
of the Electricity Act, 2003. (State governments can issue directions to SERCs under
Section 108 of the Electricity Act, 2003).
The state governments would not only clear all the outstanding subsidies to the utilities,
but ensure advance payment of subsidy as per Section 65 of the Electricity Act, 2003
in future.
The eligibility criteria for inclusion of towns under R-APDRP assistance with population
of 30,000 (10,000 for special category states) should be reduced to 15,000 (5,000 for
special category states). All district headquarter towns in special category states should
also be covered under R-APDRP, irrespective of their population.
The state governments would ensure payment of all outstanding dues from various
departments and institutions to the distribution utilities or release payments from the
state budget directly.
The state governments would consider converting their loans to the distribution utilities
to state government equity to ensure capital infusion and improvement in net worth of
the utilities.
The state governments would take effective steps to reduce AT&C losses to less than
15% by administrative measures, curbing pilferage of electricity and by setting up
special police stations and special courts to deal exclusively with power theft related
cases, if not done already.
States would immediately initiate steps to appoint distribution franchisees in urban
areas through competitive bidding.
States would immediately invite bids for meeting the uncovered generation capacity
gap vis-à-vis the requirement in their states by the end of 12th Plan. The process will
be completed by March 2012.
States would create a unit in their states for integrated planning of generation,
transmission and distribution to meet the future requirement of their states.
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