TNB - possible tariff increase

A possible tariff increase in January 2014 could serve as a boost for Tenaga Nasional Bhd (TNB).

The hike could incorporate a RM3 per million metric British thermal unit (mmbtu) increase in gas price, an increase in coal price to US$95 per tonne from US$85 per tonne as well as liquefied natural gas (LNG) to RM40 from RM38 per mmbtu. This could equate to a 15% increase in electricity tariff.

It was reported that consumers would pay more for electricity if there was an increase in fuel costs once TNB implements the Fuel Cost Past Through (FCPT) mechanism in 2014.

The Government last raised the tariff by 7%, more than two years ago in May 2011, to the current 33.5 sen per kwh. The Government might set up a stabilisation fund to share the burden with end-users.

However, the weakening (Aug 2013) in the ringgit against the dollar and yen could have an impact on TNB’s bottomline due to its foreign debt exposure.

Since June 2013, the ringgit has weakened 5% and 9% against the said currencies, which could translate into TNB recognising non-cash translation losses in its quarterly earnings.

As at May 31, 2013, TNB had RM2.72bil in US-dollar denominated borrowings, as well as RM3.83bil in yen denominated borrowings. TNB’s US-dollar denominated borrowings represented some 12% of its total outstanding loans of RM22.89bil while its yen-denominated loans accounted for about 16.7% of its total borrowings.

Estimated that for every 1% depreciation of the ringgit against the US-dollar and the yen will translate into RM27mil and RM37mil of translation loss to the group’s bottomline.

Every 1% change in the exchange rate would swing its forecasted earnings per share (EPS) for financial years 2014 and 2015 by 0.6% and 1.3% respectively.

Modest movements in coal prices in the next two to three years from Aug 2013 would bode well for TNB while waiting for the implementation of the FCPT mechanism in 2014.

Successful implementation of the mechanism will help to further re-rate TNB closer to our discounted cash flow valuation.