Energy Commission announced the continuation of ICPT mechanism in 1H19. Tenaga incurred RM1.82bn higher than assumed fuel cost generation in 2H18, which Tenaga will recoup RM308m from KWIE (for domestic customers), RM948m from higher tariff charges (for non-domestic customers) and offset the RM564m excess IBR cost and revenue adjustments. Maintain BUY on Tenaga with unchanged TP of RM16.40 based on DCFE valuation.

NEWSBREAK

Energy Commission (EC) has announced the continuation of ICPT (Imbalance-Cost Past-Through) for Jan-Jun 2019. Tenaga will pass-through RM1.82bn of higher than assumed fuel cost generation for Jul-Dec 2018. Funding for the RM1.82bn will be recovered through:

1) RM308m – KWIE fund (Kumpulan Wang Industri Electrik)

2) RM564m – IBR cost and revenue adjustments

3) RM948m – ICPT cost past through to Commercial and Industry users

Domestic customers (above 300kWh/month) will be charged an average tariff of 39.45sen/kWh with the ICPT of RM308m to be subsidized through KWIE, which is estimated to have leftover of RM646m by end 2018. Hence, this category will incur an unchanged effective average tariff of 39.45sen/kWh in 1H19.

Non-domestic customers i.e. Commercial and Industry customers will be charged with an additional ICPT of RM948m, which will be structured in 2 stages. The first stage is to maintain ICPT rate at 1.35sen/kWh (effective average tariff rate at 40.80sen/kWh) for Jan-Feb 2019, followed by second stage in increasing the ICPT rate at 2.55sen/kWh for Mar-Jun 2019 (effective average rate at 42.00sen/kWh).

IBR cost and revenue adjustments. It was revealed that Tenaga is expected to receive higher than expected revenue in 2018 (on higher than expected power demand) and Tenaga will need to pass back the RM367m excess revenue due to Revenue Cap principle under IBR2 structure. In addition Tenaga will also pass back the interests on customer deposits (RM59m), excess Single Buyer working capital (RM57m) and other income related to regulated assets (RM81m).

HLIB’s VIEW

Neutral impact to Tenaga. We remain positive on the ICPT implementation, as Tenaga will be able to recoup its higher fuel generation costs of RM1.82bn incurred in 2H18. However, we were surprised with the element of IBR cost and revenue adjustments, which Tenaga has already recognised a large portion of the RM564m as earnings in 9M18.

Maintain BUY, TP: RM16.40. We maintain BUY recommendation on Tenaga with unchanged DCFE-derived TP: RM16.40. Tenaga’s earnings and cash flow are expected to be stable under the IBR/ICPT mechanisms.

Source: Hong Leong Investment Bank Research - 17 Dec 2018