KUALA LUMPUR: One key issue that Tenaga Nasional Bhd (TNB) will face each time it announces its financial results is putting into proper perspective the seemingly huge quarterly profits in the wake of the recent rise in the price of electricity.
The top management and the communications teams at the national utility company will be kept on their toes to ensure that the public does not see the company as having taken advantage of the rakyat and the industries as they fork out more for the electricity they use.
They will try to put across some key messages. One vital message is that TNB’s capital expenditure (capex), the money it needs to plough into the business to ensure future benefits, is far larger than its profits.
Another message it will certainly emphasise is the need to ensure that the nation has a continued and efficient eletricity supply.
Hence, it needs to continue churning big profits to underwrite big ticket investments.
These are some of the changes in the offing with the advent of the economic regulatory framework called the Incentive Based Regulation (IBR) introduced by the Energy Commission, meant to “enhance the operational efficiency and transparency towards
maintaining a reliable and sustainable electricity supply”.
Effective Jan 1, a new electricity tariff took effect as part of the government’s move to gradually phase out energy subsidies, a major pressure point on the nation’s already strained fiscal position.
From the beginning of the year, the average electricity tariff in Peninsular Malaysia was increased by 4.99 sen/kWh, or 14.89%, from 33.54 sen/kWh to 38.53 sen/kWh.
With customers paying more, TNB has a delicate job to ensure that it does not come across as milking profits from its customers.
“Our investments are huge,” said TNB CFO/VP for group finance Fazlur Rahman Zainuddin.
In its financial year ended Aug 31, 2013 (FY13), its capex was RM8.5 billion. TNB posted a net profit of RM4.61 billion in FY13 on RM37.13 billion in revenue.
For its first-quarter ended Nov 30, 2013 (1QFY14), it posted a net profit of RM1.73 billion with RM9.59 billion in revenue.
Under IBR review of TNB’s projected capex and operating expenditure (opex), the Energy Commission has recommended total capex of RM23.81 billion for the four years between 2014- 2017. This works out to an annual average of RM5.93 billion.
The bulk of it, RM14.88 billion or 62%, is for distribution capex while RM8.84 billion, or 37%, is for transmission capex. So, the numbers above tell us that TNB has been spending more than its profits.
“We make it up by borrowings. Right now, it’s acceptable. In the future, when profits go up or down, sustainability becomes difficult,” Fazlur said.
As at end-November 2013, TNB carried total borrowings of RM23 billion on its books.
As with the rest of the TNB management team, Fazlur is already keeping a keen eye on the utility’s financial numbers as it moves into the new IBR regime.
In parallel with the implementation of the IBR, the government has introduced the so-called Imbalance Cost Pass Through (ICPT) mechanism for the power sector.
Under the ICPT, the fuel cost will be reviewed every six months and any changes (upward or downward) in the fuel cost due to the fluctuation in the fuel prices (namely gas, liquified natural gas, coal and alternative fuel) will be passed through to the end-user tariff, according to a TNB statement.
When discussing its prospects for its FY14 after releasing its 1QFY14 results, TNB had this to say: “With the implementation of the IBR, it is anticipated that the fuel cost risks are mitigated, therefore leading to better earnings predictability for TNB.”
In principal, TNB will be able to pass any additional cost incurred from fuel to users.
“Under the IBR, fuel cost is supposed to be neutral to TNB,” said Fazlur. The IBR and the ICPT comes into effect in 2QFY14.
In its note, CIMB Research said it gathered the IBR and ICPT will remain an “important” part of TNB’s earnings outlook as evidenced by the volatility of its fuel costs as a result of the unplanned outages.
The question remains: What if the government does not give the green light to allow a pass through cost, should one be deemed warranted as per the new mechanism? This is one of the concerns that must be on the minds of the TNB’s top brass.