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 TENAGA 5347 TENAGA NASIONAL BHD’s rising receivables raise eyebrows

WHILE the country’s power generation fuel costs are typically passed down to end-consumers under existing mechanisms, it does not mean Tenaga Nasional Bhd is entirely shielded from the sharp rise in its coal and gas prices, which have more than doubled since the start of 2021.

The impact is now being seen in the books of the utility firm, as receivables more than doubled to a record high of RM14.07 billion in the first quarter ended March 31, 2022 (1QFY2022), from RM6.29 billion a year ago. An estimated RM8.8 billion, or more than 60%, comprises additional fuel costs not accounted for under current electricity base tariffs, and imbalance cost pass-through mechanism (ICPT) surcharge for February to June 2022.

Tenaga, in its reply to questions from The Edge, says: “Due to the continued increase in the fuel price during 1QFY2022, the amounts due from the government [under the ICPT mechanism] increased correspondingly.

“The increase in the ICPT receivable [in 1Q2022] despite the ICPT surcharge adjustment was due to a continuous rise in the fuel price and the timing between the upfront payment for generation costs made by TNB and recovery of that generation costs via the surcharge under the ICPT framework,” it says.

“The recovery of higher generation costs via the ICPT mechanism will be done either from the collection of surcharges through customers’ electricity bills or claims from the government, e.g. Kumpulan Wang Industri Elektrik (KWIE).”
Cash flow squeezed before ICPT revision

In a nutshell, ICPT acts as a buffer against fuel price swings to avoid shocking the market with a sudden jump in electricity tariff. Conversely, any discount in fuel prices will result in future electricity bill rebates.

Recall that Tenaga’s receivables rose to over RM10 billion in 2018 on higher fuel prices, followed swiftly by a higher ICPT surcharge, which was wound down in 2020 when fuel prices reversed course during the pandemic.

However, since the ICPT mechanism was introduced in 2014, this is the first time fuel prices across the board have headed in one direction — north — for a prolonged period, and tariffs need to play catch-up to cover the costs being borne by Tenaga in the interim.

Since the start of 2021, prices of coal, which typically makes up half of Malaysia’s generation mix, have risen by an average of 76% every six months in the open market.

Comparatively,  an ICPT surcharge of 3.7 sen/kWh has been imposed on non-domestic users in February to June 2022 on  the base tariff of 39.45 sen/kWh compared to a rebate of two sen/kWh for the whole of 2021.

That said, Tenaga still booked RM3.5 billion in ICPT under-recovery in 1Q2022, up from RM3.21 billion in 4Q2021.

Reports show that Tenaga’s gas price rose to RM30/mmbtu in 1Q2022 from RM26.81/mmbtu in 4Q2021, while the coal reference price stood at RM696/MT, from RM723.70/MT.

Amid rising receivables, Tenaga’s cash and bank balances have fallen to their lowest level since 2018 at RM4.67 billion in 1QFY2022, down from RM6.71 billion in 4QFY2021.

Net operating cash flow shrunk to RM1.1 billion in each of the latest two quarters, also the weakest since 1Q2018.

Meanwhile, the group’s short-term borrowings have more than doubled to RM8.79 billion, from RM3.48 billion at end-2019 prior to the Covid-19 pandemic, although long-term borrowings remained stable at over RM40 billion.
The options available

To be sure, Tenaga secured supply for 77% of coal consumption for 2022 back in 4Q2021. In May, it signed agreements with Indonesia’s coal exporters, involving imports across three years for US$3 billion, up from US$2.3 billion a year ago. Indonesia supplies around 65% of Tenaga’s coal requirements.

It also secured supply for 77% of coal consumption for 2022 back in 4Q2021. In May, it signed agreements with Indonesia’s coal exporters, involving imports worth US$3 billion, for three years. Indonesia supplies around 65% of Tenaga’s coal requirements.

In the face of rising energy costs, the government is reportedly looking at improving targeted electricity subsidy mechanisms as well, apart from the widely reported petrol subsidy.

In a note, Maybank IB Research analyst Tan Chi Wei calculates the ICPT surcharge would rise to 14 sen kWh in 2H2022 to reflect the 1H2022 fuel costs, if domestic users are excluded.

“We believe that the government will likely uphold Tenaga’s pass-through mechanism for 2H2022, possibly through the form of direct compensation,” Tan says in a June 7 note.

HLIB Research analyst Daniel Wong, in a June 2 note, opines that the government “may decide for a staggered ICPT recovery over a longer period instead of all at once”, resulting in higher working capital requirement and tighter cash flow in the short term for Tenaga.

“Management believes the government would be bolder for a meaningful tariff hike only post GE15,” Wong says.
Bill collection slows

It is worth noting that another 40% of Tenaga’s receivables are made up of payments due from its industrial, commercial and domestic customers, which have also been on the rise.

These trade receivables rose 25% year on year to RM6.82 billion at end-2021, while impairments increased to RM2.85 billion or about 42% of the trade receivables.

Tenaga responds: “The electricity trade receivables have increased due to lower and slower collection as our customers were adversely impacted by Covid-19.

“Consequently, the impairment also increased when we incorporated the impact of Covid-19 into our impairment methodology. This should improve as the economy improves going forward.”

As the ICPT revision date of end-June looms, Tenaga’s share price hovers at a seven-year low of RM8.66, having declined by 7.28% this year.

Nine analysts covering Tenaga have “buy” calls on the counter, against four “hold” and four “sell” calls. Target prices range between RM7.20 and 13.60,  with an average of RM10.76.

“Risk-reward would be perceived as being more favourable if Tenaga is successful with this upcoming round of surcharge,” Maybank IB’s Tan says.

http://www.theedgemarkets.com/article/tenagas-rising-receivables-raise-eyebrows

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