Tenaga Nasional Bhd - Is the cost pass-through mechanism a permanent arrangement?

6/3/2015 – The management of Tenaga Nasional said that it is cautious on the group's prospects in FY15 due to the prevailing global economic conditions and the volatility of foreign exchange rates that will impact the Malaysian economy.

Tenaga Nasional is the main electric utility of Malaysia. It generates, transmits, distributes, and sells electricity in Malaysia. It operates six thermal stations and three hydroelectric schemes, as well as manages and operates the National Grid, which is connected to Thailand’s transmission system in the north and Singapore’s transmission system in the south.

The company just announced earnings for Q1FY15:

Revenue: +15% to RM 11.03 bln
Profit: +34% to RM 2.35 bln
Cash flow from operations: RM 2.91 bln vs RM 2.31 bln
Dividend: 0.0 sen per share vs 0.0 sen per share

The management of Tenaga said revenue increased due to the improvement in the sales of electricity mainly in Peninsular Malaysia and Sabah, which each recorded an increase of 19% and 21%.

This was the result of the increase in the average electricity tariff in Peninsula of 15% and Sabah of 17% effective 1 January 2014.

Profit grew mainly due to the increase in revenue.

Investor Central. Asian insights for global investors. We ask the tough questions of Asian companies which global investors need answers to.

Question

1. Is the cost pass-through mechanism a permanent arrangement?

Tenaga held a briefing recently to clarify the electricity tariff reduction announced by the Malaysian government.

It explained that the tariff reduction is not actually a tariff cut, but a rebate.

Therefore, Tenaga's revenue is not affected.

The rebate came about due to the over-recovery amount of RM 727 mln for 2014 and would only apply to the four-month period of March to June 2015.

There will be another review for July onwards.

So Tenaga's customers will still pay the base rate of 38.53 sen/kWh in March to June 2015 and will receive a 2.25 sen/kWh rebate on the bill.

So there is no change in Tenaga's revenue and the rebate of 2.25 sen/kWh or RM 727 mln will be added into its operating cost.

With this new system, there are two components to the electricity tariff – the base tariff, and the variable ICPT (Imbalance Cost Pass Through).

Tenaga's tariff of 38.53 sen/kWh remains untouched and it will be able to pass fuel costs or savings to its consumers, thereby increasing its earnings stability. This protects Tenaga from high prices of fuel, although the system of adjusting the ICPT means it might take some time for it to pass on the savings, or to pass on higher charges.

Is the ICPT a permanent arrangement with the government?

Question

2. Can Tenaga secure price adjustments with the government every six months?

Under the ICPT, the government will review fuel and other generation costs every six months to reflect changes. This will be "either an increase or decrease in actual fuel cost and actual generation-specific costs against a benchmark forecast cost incorporated in the base tariff, which would then translate into under- or over-recovery."

According to Kenanga, if Tenaga cannot secure the government's commitment to adjust prices every six months, this 2.25 sen/kWh rebate is as good as a one-off event.

Is Tenaga confident of securing the government's commitment to adjusting fuel prices every six months?

(Read the full story to get all 8 questions)

We have invited the company to an on-camera interview, and/or to reply to our questions in writing.

At the time of publication we have not received a reply (which is why you are seeing this message).

We will update this report if we do.

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