Tenaga Nasional (Tenaga) held its first formal 'meet the new CEO' briefing. Dato' Ir. Azman bin Mohd (Dato' Azman) is now taking over the reins of CEO (effective 1 July 2012) from  Dato' Sri Che Khalib, who has been Tenaga's President/CEO for the last 8 years.

Both were present during the dialogue session.  The session highlighted Dato' Azman's focus over the next year. More importantly, he will continue to champion for a more consistent method of dealing with fuel cost burdens. This includes implantation of a minimum Incentive Based Regulation (IBR) which will help Tenaga deliver fairer returns to shareholders while being efficient. The message from both the new and previous CEO is unanimous; the government will ensure that fuel  cost burdens must no longer be borne by Tenaga for fear of power supply disruptions. Maintain OUTPERFORM with an unchanged  TP of RM7.50 based on an average FY12-13E core EPS and target Fwd PER of 17.0x.

The new President/CEO is a home-grown breed, serving 33 years in Tenaga and was appointed to the Board of Directors in April 2010. Dato' Azman graduated with a Bachelor's Degree in Engineering (Electrical) from the University of Liverpool and holds an MBA from University Malaya. He started his career in Tenaga back in 1979 and has seen served 33 years in the company. His experience is extensive, with initial positions like District/Area Manager and eventually climbing up the ladder to Vice President of Distribution and subsequently, COO/Executive Director of Tenaga.  Moving towards Incentive Based Regulation (IBR). This is the first mention of the terminology, although hints were offered back in 2010 (Pemandu's subsidy rationalisation plan). The general idea is to determine Tenaga's appropriate rate return (minimum IBR), particularly as it generates, own and operates the nation's power utilities assets.  This is similar to what was highlighted during the subsidy rationalisation plan where ROA (operating cash flow level) must be at least equal or slightly higher than Tenaga's current WACC of 7%, which will help determine base tariff adjustments and/or level of government compensations to Tenaga.  This will help ensure Tenaga's shareholders are given a decent return while the public are not overcharged for inefficiencies. However, implementation is pre-conditioned on the 'fuel-cost-pass-through' (FCPT) tariff mechanism, otherwise the minimum IBR would be meaningless. 

Goal is to ensure Tenaga's sustainability. Dato' Azman will be focusing on delivering the goals of Gemilang 2015 (2011-15) which includes; 1) expanding works and services related to the power sector and 2) creation of new revenue stream by leveraging on Tenaga's knowledge and competencies in the business. It appears the group will be widening its overseas (e.g. MENA region) reach via REMACO (O&M services). Since efficiency will be a key factor to drive the structural changes in the sector, the group will also be moving towards compliance of PAS 55 (see below) which has the same aim as International Standards Organization (ISO).  

How confident are we of a structural reform in the Power Sector? Very! Both the government and Suruhanjaya Tenaga (ST) are on board in implementing a minimum IBR for Tenaga. In fact, Tenaga is submitting its quarterly regulated cash flow workings for the authorities to monitor. As it is, the FCPT tariff mechanism is also in effect, although it is still subjected to the government's political will. However, one thing appears to be reinforced; the government recognises that fuel cost burdens should be passed on to consumers and/or borne by the government, as long as Tenaga remains efficient. Over the years, we have seen Dato' Sri Che Khalib and team pare down gearing levels sharply while key operational indicators like UOR and SAIDI improve significantly. Although gas shortage compensations will continue until Sept-2012, we believe the government will compensate Tenaga when it off-takes gas supply from the Melaka regassification plant at market prices (3x higher than current subsidised gas price of RM13.70/mmBtu).