RAM Ratings: Impact of electricity tariff hike on TNB’s key financial metrics is neutral

Published on 01 Jun 2011

RAM Ratings expects the electricity tariff hike (effective today) to have a largely neutral impact on Tenaga Nasional Berhad (TNB or the Group). Given that the rise in tariffs will be offset by the higher price of gas payable to Petroliam Nasional Berhad (Petronas), TNB’s key financial metrics, i.e. margin on operating profit before depreciation, interest and tax and funds from operations debt coverage ratio, are likely to be unaffected by this move. 

The Government has granted TNB an average 7.12% increase in electricity tariffs of which 5.12% is to recover the Group’s additional fuel expenditure based on the higher price of gas from Petronas, which will be elevated from RM10.70 per million metric British thermal units (mmBtu) to RM13.70 per mmBtu while the remainder 2% is to partly recover the higher operating costs since June 2006.

Nevertheless, any pressure on TNB’s margins will likely be exerted by rising coal prices. As coal is procured at international prices, the Group remains vulnerable to unfavourable movements in coal prices and/or foreign-exchange rates. The newly revised tariffs are still based on a coal price of USD85 per metric tonne (MT) even though the Group’s average coal procurement price is higher. We expect TNB’s average coal price to come up to USD120 per MT in FYE 31 August 2011. Nevertheless, the stronger ringgit against the US dollar may help moderate negative effects of its heftier coal-powered generation costs. On this note, a fuel-cost pass-through (FCPT) mechanism will also be introduced under which TNB’s fuel costs will be reviewed every 6 months to allow the electricity giant to pass on increases in fuel prices (i.e. gas, coal and oil). By the same token, TNB will also – under the FCPT mechanism – pass through any savings from a retracement in fuel costs to consumers. While the implementation of the FCPT mechanism will allow the utility company to mitigate the impact of fluctuating fuel costs, any tariff adjustment then remains to be seen.

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