An  Edge  Financial  Daily  report  said  Deputy  Energy,  Green  Technology and Water Minister Datuk Seri Mahdzir Khalid told Parliament yesterday that  Tenaga  Nasional  (TNB)  will  implement  the  long  anticipated  fuel cost  pass-through  mechanism  next  year.  If  this  materialises,  it  will  be positive  for  TNB  as  it  would  be  able  to  pass  on  the  fluctuations  in  its uel  costs  to  ensure  long-term  earnings  sustainability.  Maintain OVERWEIGHT on the sector.  

- A  mechanism  that  should  have  taken  effect  in  2011.  The  fuel  cost pass-through  formula,  first  introduced  in  mid-2011,  was  supposed  to have  been  reviewed  every  six  months  to  reflect  the  movements  in  fuel cost. However, since then, TNB had only revised its power tariff once in June 2011, while the subsequent hikes had been frozen. 

- Natural  gas  cost  to  be  eventually  floated.  The  move  to  pass  on  the rising  cost  of  fuel  coincides with the commencement of Petronas Gas’ regasification  terminal  in  Sg  Udang  in  Melaka  in  3QCY13.  We  believe this proposal is aimed at  reducing the Government’s subsidy on natural gas  for  power  generation  purposes,  which  is  estimated  at  MYR3bn  to MYR5bn a year.

- Tariffs  could go  up  by  50%  or  more.  Should  the  natural gas price  be floated  to  the  MYR35-MYR40  per  million  metric  British  thermal  unit (mmbtu)  range  vis-à-vis  the  current  subsidised  price  of  MYR13.70  per mmbtu,  we  estimate  that  electricity  tariffs  would  have  to  be  revised upward by more than 50% to neutralise the impact. Taking into account the  potential  magnitude  of  the  tariff  adjustments,  we  believe  such implementation  will  still  likely  be  on  a  staggered  basis  as  proposed initially.

- Maintain  OVERWEIGHT.  Should  the  proposal  materialise,  it  will  be  a long-term  positive  for  TNB  (BUY;  MYR8.98)  in  ensuring  the  national utility company’s earnings sustainability. Nonetheless, we note that given the political interests at stake, the timing of implementation may be fluid. Maintain  OVERWEIGHT  on  the  sector  as  we  await  the Government’s confirmation on implementation of the mechanism.  

Source: RHB