K-Electric Sale To Shanghai Electric Power Faces Uncertainty

K-Electric (KE) takeover deal by Shanghai Electric Power (SEP) is in hot waters. SEP told its shareholders that if KE Multiyear Tariff (MYT) issue is not resolved according to expectations, they will terminate the deal.

This was announced by SEP board of directors in Shanghai Stock Market. After the rating agency Standard & Poor’s (S&P) announce the SEP outlook negative if it proceeds for the KE takeover deal.

The SEP board of directors says in its announcement that KE has submitted a formal reconsideration material to National Electricity Regulatory Authority (NEPRA) and NEPRA has formally accepted the application. The SEP and KE are actively negotiating with NEPRA and have expressed confidence in obtaining a new MYT that meets SEP’s expectations.

“Before the final result, there is still the possibility of the company’s profitability due to change in tariffs, and carries the risk of the termination of this transaction.” says SEP.

The transaction was completed but there was still a risk in the transaction, and investors were asked to pay attention to the major risk hints of the Significant Asset Purchase Report issued by company.

On the other hand, S&P affirmed the SEP rating off credit, while keeping an eye on a negative outlook. In its announcement S&P said that MYT is the key for the KE takeover deal.

S&P claims that the Pakistan based integrated electric utility is currently in the process of appealing for the MYT.

“The recent regulatory review of KE’s MYT scheme, with results failing SEP’s expectations, would raise uncertainty and prolong the process of this acquisition.” says S&P.

KE Multi Year Tariff

KE filed a petition with NEPRA for the review of MYT. On this regard, NEPRA issued MYT and reduced it from Rs. 15.57 to Rs. 12.07 which shows a clear decline in tariff of Rs. 3.50 per unit. On the other hand KE demands Rs.16.23 as it was 66 paisa higher than current tariff. It should be noted that this MYT is for the period of 2016 till 2023.

On basis of this tariff, SEP and KE agreed on share purchase agreement with management rights. Abraaj Group (KE owner) and SEP inked an agreement of US$ 1.77 billion for the sale of KE’s 18.335 billion shares. However, after NEPRA declined KE’s demand of increased MYT and in turn declined it by Rs. 3.50, the deal went on halt and is still on hold while waiting for NEPRA’s final action.