News

Deputy Energy, Green Technology and Water Minister, Datuk Seri Mahdzir Khalid stated that TNB will resume implementing fuel-cost-past-through (FCPT) mechanism in 2014 to regulate electricity tariff more efficiently.

The FCPT mechanism allows any changes in fuel cost to be past-through to end users through periodic tariff adjustments of every 6 months, in tandem with the scheduled natural gas price revision, as well as taking into account of prevailing market price of coal and oil.

Hence, the higher fuel price (gas, coal and alternative fuels) will be reflected in higher tariff and vice versa, under FCPT. Users will also be given an incentive for efficient power usage, while a penalty will be put in place to punish power wastage. The country’s economic performance and user’s cost living will also be taken into consideration under FCPT.

FCPT is part of the government’s initiated IBR program (Incentive Based Regulations). The IBR program will be put under interim period (trial run) for Sept 2013 - Aug 2014, before full implementation in Sept 2014.

Comments

We are positive on the statement, as it reaffirms our view on the earnings neutral impact of the higher imported natural gas price on TNB.

The FCPT was firstly implemented in June 2011, when natural gas price was revised up from RM10.70/mmbtu to RM13.70/mmbtu (scheduled to increase every 6 months). However, the following tariff and gas price revisions were being delayed with no updates until today.

Melaka LNG regassification plant has finally commenced operation since end-June 2013 (delayed from June 2012), which will give gas supply security to TNB. The imported LNG is priced at international price of RM40-45/mmbtu. TNB will not bear the additional cost, as the government is setting up new fund to finance the additional cost.

The continuation of FCPT will reduce the financing stress on the government’s fund overtime, while encourage efficient power usage and reduce wastage (higher cost to user).

Risks

Downside risks: 1) Disruption in gas supply; 2) Delay in tariff revision; and 3) Indonesia implement tax on coal export.

Forecasts

Unchanged.

Rating

BUY

Positives –

• Lower coal price at ~US$90/mt.
• Implementation of automatic FCPT mechanism which eliminates uncertainties about future earnings.

Negatives –

• High commitment on IPPs payments.
• Utilization of coal-fired power plants have reach limit.
• Decision on tariff revisions depends on the government.

Valuation

Maintain Buy with unchanged TP of RM9.05 based on DCFE.

Source: Hong Leong Investment Bank Research - 9 Jul 2013