Gujarat State Petronet (GSPL) :Not harsh, but a poor tariff order :Nomura research

Tariff order not harsh, but would add to confusion
The Petroleum & Natural Gas Regulatory Board (PNGRB) has finally
issued the “provisional initial unit” tariff order for Gujarat State Petronet
(GSPL). On first look, compared to PNGRB’s earlier tariff orders for other
entities, the order appears soft. The determined tariff of INR23.99/mmbtu
(INR904/scm) seems good for GSPL, in our view, and better than street
expectations of INR750-850/scm. Even as the headline tariff indicates a
tariff reduction, and payout for retroactive implementation, we think the
actual payments may not be much, and GSPL’s average reported tariff
numbers may not decline much. But in the short term, there will be added
confusion till clarity emerges on retroactive payments, and actual impact
on GSPL’s realised tariffs going forward.

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Tariff 12% lower than current; but only 2% lower than past 5-year
avg
The determined tariff of INR24/mmbtu includes 0.3% of System Use Gas
(SUG), which was hitherto not charged, but taken in kind from
customers. Adjusted for SUG, the determined tariff is:
 12.5% lower than current average tariffs of INR27.4/mmbtu. Of this
6.5% is due to lower tariff and 6% due to disallowance of SUG.
 Only 2% lower than average tariff since FY09
 5% higher than our avg LT tariff assumptions of INR800/mscm
Retroactive order applicable from 20 Nov 2008
GSPL’s high pressure pipeline network was authorised recently in July
2012. Company had suggested tariff order either from April 2011 or April
2012. But, PNGRB has continued to insist on retroactive implementation
effective 20 November 2008.
We highlight that each tariff order is applicable for five years. The current
tariff order is a provisional tariff order with final tariff to be decided in a
year’s time. By the time PNGRB finalises the final tariff, the term of the
current order (Nov 2013) may well lapse, in our view.
The insistence on having such a backdated tariff does not seem very
logical to us. It will create a lot of confusion as to calculation of past costs
and refunds etc, which would need to be worked out for each customer
and each year separately. When overall tariff amounts are low (relative
to gas costs) and not many complaints from customers that tariffs are
high, we find it difficult to justify the need for such retroactive orders.
Outlays for past charges may not be high
As we highlight, the working out of past tariff and system usage charges,
will be cumbersome and create confusion.
In our view, calculating outlays on the basis of the headline tariff cut and
system use charges could be misleading and at max may indicate the
upper range. This would imply total impact of:
 INR2.5bn for 6.5% cut in tariff.
 INR2.3bn for 6% impact due to SUG not being allowed


But, we highlight that as GUJS’s determined tariff is only 2% lower than
the average realised tariff for last 5 years. This would imply impact of
only INR650mn for past periods.
The actual payment would be somewhere in that range but may not
exceed INR1bn, in our view. This would imply an impact of INR1.20/
share or 14% for FY13F earnings for retroactive adjustments. We will
await clarity from management as to the likely actual payment


Long but not a progressive tariff order
Even as the tariff order is much longer and PNGRB has tried to explain
in detail the rationale on several issues, we think it is not a progressive
order. It would create more confusion in the near term, and as it is
applied with retroactive effect, the order itself could become stale very
soon.
We highlight few of issues:
 Insistence on retroactive implementation from Nov-2008
 Order only for GSPL’s high-pressure network. It is silent on its lowpressure
network. The network is operated as a single network and
GSPL does not disclose its numbers separately for these two
networks. Given that order is coming after such a delay, we think an
order for both networks together would have made much more sense.
 Insistence on accounting depreciation rate of 8.33% for periods prior
to April-2010, even as the Ministry of Corporate Affairs has now
allowed the rate of 3.17%. For its book of accounts GSPL had charged
the rate of 8.33% as conservative accounting, but for tariff calculations
it was asking for the permitted rate. PNGRB has disallowed this on the
grounds that it would result in higher net fixed assets and thus a higher
tariff. We think if the rate was allowable, it should have been given.
 PNGRB has considered an inflation rate of only 4.5% as per “extant
practice”. This rate is too low, in our view, when current headline
inflation rates range 8-10%.
 Disallowed ongoing capex of INR10mn per km of spur pipelines
beyond FY15, as GSPL could not give enough data. In our view,
adding spur pipelines in a network is an ongoing phenomenon, and
such pipelines do not take more than two years to build. The 50km of
spur pipelines each year looks reasonable to us.
 Continues to disallow unaccounted for gas. Even as GSPL submitted
that such losses are industry wide, and cited international reports/
practices, PNGRB did not agree similar to earlier orders.