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A good petition to start with, but a long way to go
TANGEDCO, the Tamil Nadu power distribution company, has recently
submitted a petition to raise power tariffs by 37% for FY13. To recap, there has
been relentless pressure from Indian financial institutions requesting tariff hikes
as many felt that it would be a panacea to their problems. However, a look at
some of the details, especially incremental debt at 80-100% of sales, and the
inexplicable gap in volume data between the CEA and the distribution
company, suggests long-term gains can largely be met by efficiency
improvements. We prefer low-cost gencos such as JSPL and a grid-co like
Power Grid.
TANGEDCO’s key assumptions are based on high tariffs and lower costs
A look at the details of the petition suggests that revenues are assumed to rise
by 45% in FY13 driven by a 37% blended increase in tariffs and an 8.5%
increase in volumes. The forecast cost for FY12 is expected to rise by 6% in
FY13 – largely driven by higher fuel costs for own generation, while assuming a
sharp 57% reduction in merchant power purchases to 5.3BU, which accounted
for >15% power bought by the state. What is interesting to note is that the
petition has urged the regulator to give tariff increases of 42% to domestic
users, 19% to industrial users and 589% to agricultural users. On the cost side
the company’s assumptions suggest that cost escalation would now no longer
be driven either by higher debt or employee costs.
Our worry stems from progress on key efficiency parameters
In the absence of filings of annual statements of balance sheet and cash flow,
we struggle to figure out the stresses in the balance sheet. Our calculations
suggest that for an INR15bn incremental rise in interest for FY12, the debt
burden could have more than doubled to INR530bn. Looking at the petition
and seeing that actual cost increases for purchases reached INR229bn (+19%
yoy) in FY12, it is possible that a major part of the debt was used to fund the
payables on an expected revenue shortfall of INR145bn. Moreover, we still
cannot reconcile the volume data from the CEA (ministry of power) and those
used by TANGEDCO, suggesting that perhaps the difference could be system
losses over and above those reported by the company. Lastly, the company is
continuing to capitalize some of its labor costs, thus understating the actual
cost. While it is clear that the government will partly bear the increased costs
for the needy, the quantum of the subsidy burden has still not been specified,
making it difficult for the regulator to approve tariffs.
Prefer low-cost gencos like JSPL and a grid-co like Power Grid
While policy makers are trying to address manageable issues like SEB
finances, the coal shortfall cannot be plugged as easily, in our view. We
continue to prefer low-cost gencos like JSPL, which have the ability to leverage
access to low-cost coal assets; and Power Grid, which is building a monopoly
transmission network in India, where a bottleneck is emerging
Other takeaways from the tariff petition
Sharp tariff hike: the proposed tariff hikes, though looking steep at 37%, is not
enough to cover forecast FY13 losses (of USD2.9bn); ideally a hike of 55%
would have enabled break-even. Nevertheless, looking at the regulatory filings,
the petition seems to be very bold – 400-500% increases for Lift irrigation
consumers, huts, agricultural and government farms, while 60-130% increases
have been proposed for religious places, public lighting, cottage/tiny industries
and power looms.
Free Power remains for huts, handlooms (<100units), power-looms (<500 units)
and agri consumers, as the government has decided to share the increased
burden for the needy.
Accumulated losses: INR167.7bn accumulated losses before unbundling (up to
FY09) have been written off against consumer contributions, land revaluation
reserves. Further financial restructuring will address INR172bn accumulated
losses for FY10 and FY11 post final unbundling. Post-August 2010 tariff hike,
regulatory assets will be created and allow recovery over the next five years.
Pension provisioning: terminal benefits for employees, i.e., pension liabilities
and gratuities, have not been provided for, and will be accessed once the
unbundling exercise and asset transfer is completed.
Cost curtailment: the distribution company is pinning its cost reduction hopes
on a 22% increase in own generation for FY13. It also expects a 3% decline in
power purchase costs despite a 2% increase in volumes due to significant cuts
in high-cost power purchases from traders (-57%) and NTPC's gas based
generation to nil from Kayamkulam (INR14.75/kWh cost).
Loans: No further loans seem to be envisaged in the petition, given that interest
costs assumed for FY13 are up just 6.5% YoY vs. a 91% increase in FY12P.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
A good petition to start with, but a long way to go
TANGEDCO, the Tamil Nadu power distribution company, has recently
submitted a petition to raise power tariffs by 37% for FY13. To recap, there has
been relentless pressure from Indian financial institutions requesting tariff hikes
as many felt that it would be a panacea to their problems. However, a look at
some of the details, especially incremental debt at 80-100% of sales, and the
inexplicable gap in volume data between the CEA and the distribution
company, suggests long-term gains can largely be met by efficiency
improvements. We prefer low-cost gencos such as JSPL and a grid-co like
Power Grid.
TANGEDCO’s key assumptions are based on high tariffs and lower costs
A look at the details of the petition suggests that revenues are assumed to rise
by 45% in FY13 driven by a 37% blended increase in tariffs and an 8.5%
increase in volumes. The forecast cost for FY12 is expected to rise by 6% in
FY13 – largely driven by higher fuel costs for own generation, while assuming a
sharp 57% reduction in merchant power purchases to 5.3BU, which accounted
for >15% power bought by the state. What is interesting to note is that the
petition has urged the regulator to give tariff increases of 42% to domestic
users, 19% to industrial users and 589% to agricultural users. On the cost side
the company’s assumptions suggest that cost escalation would now no longer
be driven either by higher debt or employee costs.
Our worry stems from progress on key efficiency parameters
In the absence of filings of annual statements of balance sheet and cash flow,
we struggle to figure out the stresses in the balance sheet. Our calculations
suggest that for an INR15bn incremental rise in interest for FY12, the debt
burden could have more than doubled to INR530bn. Looking at the petition
and seeing that actual cost increases for purchases reached INR229bn (+19%
yoy) in FY12, it is possible that a major part of the debt was used to fund the
payables on an expected revenue shortfall of INR145bn. Moreover, we still
cannot reconcile the volume data from the CEA (ministry of power) and those
used by TANGEDCO, suggesting that perhaps the difference could be system
losses over and above those reported by the company. Lastly, the company is
continuing to capitalize some of its labor costs, thus understating the actual
cost. While it is clear that the government will partly bear the increased costs
for the needy, the quantum of the subsidy burden has still not been specified,
making it difficult for the regulator to approve tariffs.
Prefer low-cost gencos like JSPL and a grid-co like Power Grid
While policy makers are trying to address manageable issues like SEB
finances, the coal shortfall cannot be plugged as easily, in our view. We
continue to prefer low-cost gencos like JSPL, which have the ability to leverage
access to low-cost coal assets; and Power Grid, which is building a monopoly
transmission network in India, where a bottleneck is emerging
Other takeaways from the tariff petition
Sharp tariff hike: the proposed tariff hikes, though looking steep at 37%, is not
enough to cover forecast FY13 losses (of USD2.9bn); ideally a hike of 55%
would have enabled break-even. Nevertheless, looking at the regulatory filings,
the petition seems to be very bold – 400-500% increases for Lift irrigation
consumers, huts, agricultural and government farms, while 60-130% increases
have been proposed for religious places, public lighting, cottage/tiny industries
and power looms.
Free Power remains for huts, handlooms (<100units), power-looms (<500 units)
and agri consumers, as the government has decided to share the increased
burden for the needy.
Accumulated losses: INR167.7bn accumulated losses before unbundling (up to
FY09) have been written off against consumer contributions, land revaluation
reserves. Further financial restructuring will address INR172bn accumulated
losses for FY10 and FY11 post final unbundling. Post-August 2010 tariff hike,
regulatory assets will be created and allow recovery over the next five years.
Pension provisioning: terminal benefits for employees, i.e., pension liabilities
and gratuities, have not been provided for, and will be accessed once the
unbundling exercise and asset transfer is completed.
Cost curtailment: the distribution company is pinning its cost reduction hopes
on a 22% increase in own generation for FY13. It also expects a 3% decline in
power purchase costs despite a 2% increase in volumes due to significant cuts
in high-cost power purchases from traders (-57%) and NTPC's gas based
generation to nil from Kayamkulam (INR14.75/kWh cost).
Loans: No further loans seem to be envisaged in the petition, given that interest
costs assumed for FY13 are up just 6.5% YoY vs. a 91% increase in FY12P.
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