Tenaga Nasional Bhd
(Feb 16, RM14.02)
Maintain neutral with an unchanged target price (TP) of RM14.64. TNB’s management held a briefing last Friday to provide further clarification on the imbalance cost pass-through (ICPT) mechanism. 

An explanation on the previous estimation of an under-recovery of RM848 million versus the over-recovery amount of RM727 million as announced by the government last week for the ICPT period from January until December 2014 was also given during the briefing, helmed by TNB chief executive officer Datuk Seri  Azman Mohd, chief financial officer Fazlur Rahman Zainuddin and vice-president (regulatory economics and planning) Datin Roslina Zainal. 

The key message put across was that there will be no impact on TNB’s revenue arising from the ICPT implementation as electricity base tariffs will remain at 38.53 sen per kWh under the incentive-based regulation (IBR) framework for regulatory period from calendar year 2015 (CY15) to CY17. 

A major bulk of ICPT savings (about RM627 million) will be recognised in the financial year ending Aug 31, 2015, therefore rebates given to consumers in the form of lower electricity tariff from March 1, 2015 to June 30, 2015 and recognised as cost will be absorbed by the ICPT savings. 

Hence, we expect no financial impact on our net profit estimates, correspondingly leaving our earnings forecast and assumptions unchanged, along with our “neutral” call and TP of RM14.64.

Electricity tariffs under the IBR framework consist of two components, base tariff and the ICPT. Under the ICPT, fuel and other generation costs will be reviewed every six months to reflect changes, either an increase or decrease in actual fuel cost, and actual generation-specific costs against a benchmark forecast cost incorporated in the base tariff, which will then translate into under- or over-recovery. 

The Energy Commission of Malaysia will determine the calculation and methodology of the ICPT, subject to government approval.

According to TNB’s website, the ICPT charge is a variable component and consumers will be charged based on monthly electricity consumption. 

We believe there will be a separate item (in addition to the current base tariff rate of 38.53 sen per kWh) in consumers’ electricity bills to reflect the ICPT charge, therefore any under or over-recovery of ICPT will be reflected with a positive or negative amount in this column and does not affect the base tariff. 

In case the new ICPT cost is not decided after June 2015, the ICPT charge should be zero in the electricity bill and the effective electricity tariff rate should normalise to the base rate of 38.53 sen per kWh. 

Any further adjustment to the ICPT cost beyond July will be based on estimated fuel and generation costs for the period January to June 2015, subject to government approval.

According to the management, power purchase agreement savings of about RM1 billion until June 2015 have not been utilised due to the ICPT over-recovery of RM727 million for CY14.

We see these savings acting as a cushion to protect any lower-than-expected revenue from tariff adjustment or higher-than-expected fuel and generation costs should there be a shortfall in the ICPT recovery. — PublicInvest Research, Feb 16

This article first appeared in The Edge Financial Daily, on February 17, 2015.