In terms of operational segments, Transelectrica provides three main services: (i) electricity transmission: (ii) power system management by dispatcher consisting of technological system services and functional system services and (iii) administration of the electricity market. The revenues from system and market balancing services, which account for some 60% of total turnover, are pass-through revenues and have no impact on the bottom line.
Starting 2005, the transmission tariff charged by the company is set based on a revenue cap methodology. The regulatory authority sets a yearly target revenue within a five-year framework (however, the first such framework extended over three years, 2005-2007).
The regulated return on the asset base (RAB) has been agreed for the period 2008-2012 at 7.5% and is pre-tax and in real terms. The beginning of the third regulatory period was delayed by one year to 2014. Over 2013-2015 the company plans investments worth EUR 400 mn, revolved around the connection to the grid of the new wind parks, the development of interconnection capacity and grid strengthening.
? Electricity transmission is a natural and legal monopoly, Transelectrica being the only licensed operator.
? Regulatory regime should induce a stable revenue stream and an approved level of return on assets.
? Other revenues could boost the profitability above the regulated profit on transmission.
? As a state-owned company, Transelectrica must pay a minimum 50% of the net profit as dividends (90% in 2010&2011 profit and 85% in 2012).
? Independent board members should be appointed over the following period.
? The regulatory risk is high, as the regulator could decide to bypass the revenue-cap methodology to keep energy prices down.
? Delayed commissioning of investments could lead to delayed tariff adjustments.
? State retains majority position in the company, management still named politically.
? RON volatility influences bottom line through FX loans revaluation.
? Dividend policy remains the prerogative of the state.
Management guidance low despite 13% tariff rise
2 April 2013
At the beginning of 2013, transmission tariffs were raised by 13% but the start of the third regulatory period has been delayed by one year until 2014. In the meantime, the management provided the 2013-2015 budget for the company which shows weak profits (around RON 30 mn) and confirms our suspicions that probably not the whole operating cost base of the transmission business would be included in the regulated revenues. This is why we assume a gap, though narrowing to RON 60 mn at the end of the third regulatory period, between the operating return and the inflated return on the asset base. Along the significant increase in 2013 tariffs we see a corresponding or even stronger upward adjustment in costs and overall our estimates are lower than our previous numbers. Our DDM model points to a 12-month TP of RON 14.8. Including the dividend proposed of RON 0.404 the adjusted target price stands at RON 15.2 (RON 16). Given the low upside potential versus our target price we downgrade our recommendation to “hold”.
Transelectrica reported its 2012 result only under IFRS and the figures are thus not fully comparable with the quarterly results prepared according to local standards. However, apart from discrepancies in the financial result, the results were rather close to our estimates.
We expect volumes transported to come up by 1% in 2013 and by 2% going forward, slightly below the estimated GDP growth. With the significant rise in tariff for 2013 we took into account minor corrections going forward.
The start of the third regulatory period has been delayed by one year until 2014. The reasons for the delay were the regulator’s request to be granted additional time (i) to analyse the efficiency of the investments realized over the last regulatory period as the base for the investment plans for the following regulatory period, and (ii) to analyse the opportunity for the introduction of binomial tariffs, with a component based on volumes transported and one based on grid capacity. The introduction of binomial tariffs would be beneficial for the company as it would lower the dependency on volumes transmitted.
In 2012, around 33% of the grid losses were purchased from the regulated and balancing markets where prices are some 20% higher than on the day-ahead or centralized markets. We no longer expect purchases from the regulated market and we assume the price of the grid losses will follow a downward trend as noticed on the day-ahead market. We expect the grid losses as percentage of volumes transported to drop but at a rather weak pace. For the period 2013e-2015e the company budgeted a rise in maintenance costs (included in third parties expenses) compared with 2012. We assume they rise with around 24% yoy in 2013 and with inflation going forward. We included the monopoly tax which we see at around RON 10 mn in 2013 (according to the guidance provided by the management) and around RON 11 mn in 2014.
Overall, we assume the increases in costs outpace the revenues growth and longer term our forecasts stand below our previous figures. We disregarded the budget of the company which outlines a net profit around RON 30 mn for 2013e-2015e, but we believe this lends credibility to our view that not all the cost base is actually included in OPEX and thus in regulated revenues. We used in 2013 the pay-out from the budget of 85% and going forward we assumed a pay-out of 55%, mainly due to the sizable investment budget.
Significant investment plans for 2013 - 2015
The company announced its investment plans over 2013e-2015e. Investments for 2014e and 2015e exceed the amounts over the last years coming close to RON 700 mn while in 2013e the capex (excluding the investments financed from the fees for connection to the grid and those financed with EU funds) stands at RON 330 mn, below our estimate. We based our figures for 2013e on the plan announced by the company but for the following years we assume that investments would surge close to RON 550 mn, as we expect the roll-out of the investments will take longer than in the management’s view.