Tenaga Nasional to power on recent electricity tariff re-rating

KUCHING: Tenaga Nasional Bhd’s (Tenaga Nasional) recent electricity tariff hike of 14.9 per cent for Peninsula Malaysia and 16.9 per cent for Sabah, effective January 1 this year, will drive its earnings revision cycle over the coming quarters.

According to AmResearch Sdn Bhd (AmResearch), while there is some political opposition to the tariff hikes, management held the view that the new rate structure would be imposed as announced.

“We also expect the competitive bidding process to build new power plants to drive down the group’s prospective cost structure together with the implementation of the ongoing incentive-based regulatory measures,” it projected.

Additionally, the research house opined that coal prices which have risen over the past two months to almost US$85 per tonne (versus the US$87.5 per tonne embedded in the new tariff) is likely to moderate post-winter season.

In terms of the savings from the reduction in capacity charge since March 1, 2013, for the first generation power purchase agreements which have been extended by another 10 years, will be kept in a special account, which is at the disposal of the Energy Commission.

“It is uncertain at this stage what the funds will be used for, but we think it will likely still be used as part of an earlier proposed fuel stabilisation fund, as the government has proposed for fuel subsidies to be reduced bi-annually,” AmResearch opined.

Overall, the research house’s forecasts have already incorporated the group’s net tariff increase of three per cent, arising from the hikes in electricity and natural gas prices. The net increase stems from the 2.7 per cent increase from base tariff plus another 0.5 per cent from the higher US$87.5 per tonne (an increase of three per cent) coal price embedded in the new tariff structure.

“Our coal cost assumptions are maintained at US$85 per tonne, as Newcastle coal prices are still currently below this level.

“We expect prices, which has rallied by 10 per cent since September this year, to level off after the winter season together with the completion of contract negotiations between coal mines and buyers,” AmResearch said.

Its electricity demand growth assumptions for financial year 2014 forecast to financial year 2016 forecast (FY14F to FY16F) are also maintained at four per cent.

In terms of the base tariff, which was adjusted in 2006 and 2011, it will be applied at the new rate (an increase 0.9 sen per kilowatt hour) from 2014 to 2017, unless there are major changes in the tariff assumptions in operating parameters such as rapid energy consumption or accelerated operating expenditures from new population centres.

The four-year period of unchanged base tariff include a trial period of one year.

“We understand that the six-month tariff review structure will be largely intact even after the implementation of the group’s incentive-based regulatory measures, which has eased the regulatory process between the Energy Commission and Cabinet,” it noted.

The research house further added that the automatic cost-pass through mechanism, which was much discussed in the past, is unlikely to become a reality in the near future given the significant social impact under the current policy trend to reduce subsidies.

The new tariffs for Sabah Electricity Sdn Bhd (SESB) at 34.5 sen per kWh, is still four sen below Peninsula’s 38.5 sen per kWh, but higher revenue will raise Tenaga Nasional’s earnings further by RM200 million.

The fuel subsidies for SESB, largely due to costly diesel usage, will be maintained by the government.

“Currently, we understand that SESB registers minimal losses due to the fuel subsidies. Hence, Sabah’s five sen tariff hike involve entirely base tariff and not energy cost pass-through.

“But for now, our assumptions assume a neutral earnings impact from SESB as costs may escalate from the ramping up of capex rollouts to ensure a wider distribution network and more stable electricity supply in Sabah,” it said.

The Energy Commission is expected to call for a competitive bidding for two gas-fired power plant with a total capacity of 2,000 megawatts (MW) under Track 4A and Track 4B this year, after the award for Project 3B involving a greenfield 2,000MW coal-fired power plant, which is likely to be secured by 1Malaysia Development Bhd (1MDB).

The research house noted that the Energy Commission needs to continue raising Peninsula Malaysia’s power generation capacity post-2019 as well as maintaining a comfortable mix of fuel-based power generation given that coal-fired power generation will rise from 45 per cent in FY13 to over 60 per cent by 2018 when 5,000MW of new coal-fired capacities has started operations from Janamanjung blocks 4-5, Malakoff’s new Jimah plant and Project 3B.

“As Tenaga Nasional maintains its near monopoly status in the transmission and distribution of electricity in Peninsula Malaysia, the group has the natural advantage in any competitive bid, including Track 4A-4B, for new power generation.

“We expect the competitive bidding process to continually drive down Tenaga Nasional’s cost structure, which will positively accrue to the group’s earnings given that the base tariff has been set until 2017,” the research house projected.

All in, AmResearch maintained its ‘buy’ call on Tenaga Nasional  with a higher discounted cash flow-derived fair value of RM14.90 per share compared to RM13.10 per share earlier, which implies a current year 2014 forecast price earnings of 16-fold and a price to book value of 2.4-fold.

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