This article first appeared in The Edge Financial Daily on July 18, 2018
Tenaga Nasional Bhd
(July 17, RM14.78)
Maintain hold with a lower target price of RM15: Recently, we met up with Tenaga Nasional Bhd (TNB) to seek more clarity on the incentive-based regulation (IBR). We gathered that TNB will no longer enjoy the benefit of higher average base tariffs from changes in customer mix under regulatory period 2 (RP2) as the distribution network is now under a revenue cap instead of a price cap. The surplus of the revenue will be channelled back to the IBR system after the annual review.
In total, TNB transferred about RM2.65 billion to Kumpulan Wang Industry Elektrik (KWIE) as of early 2018. We estimate the KWIE account should have about RM300 million at the moment after deducting imbalance cost pass-through (ICPT) costs of: i) RM1,303 million for the July to December 2017 period; ii) RM929 million for the January to June 2018 period; and iii) about RM100 million for the July to December 2018 period. The balance of RM300 million will likely be used to buffer domestic customers from future ICPT surcharges.
Last week, Energy, Technology, Science, Climate Change and Environment Minister Yeo Bee Yin said that the ministry will review the independent power producer (IPP) contracts that have been awarded through direct negotiations in order to keep generation costs under control. The government subsequently decided to terminate four IPP contracts. We believe more sector reform initiatives may be in the pipeline as the minister has highlighted affordable, sustainable as well as secured electricity.
We see risk for power generators, particularly for: 1) power plants with expiring power purchase agreements (PPA); and 2) upcoming plants awarded through direct negotiations. Power plants with PPAs expiring in the near term may not get an extension due to the high excess power reserve of 28.8% as of 2016. We gather that PPAs of three of TNB’s plants (about 760mw) are expiring in 2018 to 2020 while three new plants (about 3,500mw) are coming on board in 2018 to 2020. — CGSCIMB Research, July 16