This article first appeared in The Edge Malaysia Weekly on September 28, 2020 - October 4, 2020

TENAGA Nasional Bhd is moving forward with its transformation journey and preparing for any eventual liberalisation in the power industry. The Edge finds out what CEO Amir Hamzah Azizan has been up to since he took the helm at the national utility company and what the future holds for it.

The Edge: It has been about a year since we last met. How has it been since you were appointed?

Amir Hamzah Azizan: When you guys met me last year, it was just when I came to Tenaga. A lot of people were wondering, ‘What will this guy be doing with Tenaga?’ One of the key things was, and I was a bit deliberate about it, the important thing for us to do was to actually understand what the purpose of Tenaga, and I was clear that I wanted to spend time to make sure that I understood the nuances of Tenaga and find the Tenaga way of actually managing it. In that process, it was clear what we had to do was to refine Tenaga, make it much more efficient and to prepare Tenaga for ongoing changes in the landscape.

We talked a lot about what those changes could be like, depending on the way MESI (Malaysian Electricity Supply Industry) went. The good thing is we are on track to do it. Next week, we will have the GenCo (generation company) fully operational as a standalone subsidiary, running as a company, managing all of our generation business. With RetailCo, we will be looking at Jan 1 — it is a little later than what was expected, but that was expected. We are continuing with the game plan of separating and putting those assets into those entities so that we get better focus in managing the businesses. I am confident that will result in good things for Tenaga going forward.

Could we expect more acquisitions from Tenaga?

If it makes sense in terms of the strategic growth plan of Tenaga, we will. If you ask me what the key thing is that Tenaga will be looking at, it is actually renewables. We look at strengthening our renewables play more because we have to shift. We will be looking predominantly at renewables, but the key is that it has to fit. Just doing for the sake of doing … I’m not into the chase, I’m into making money.

When you look at our game plan as an organisation, we aspire that within the next five years, our renewable portfolio will have something like 1,700mw of renewables, both internationally and domestically. Today, internationally, it is just about 500mw, domestically about 80mw plus another 56mw, so I am still short of about 1,000mw.

If you look at renewables also, what we are learning from the renewables business is that the development of corporate PPAs (power purchase agreements) is very important. Historically, in our generation business, everyone looks forward to PPAs. Government-underwritten PPAs, where you get a coal plant for 25 years, gas plant for 21 years, so the art is to get a contract, with good technical [expertise], build, then operate.

We noticed that — of course this year is not a good one to compare with because of the pandemic — in 2019, although earnings grew, if you compare over a longer horizon, it is still lower than the earlier years. What do you have to say about this?

There are two things. One, let’s talk about areas that disrupt the yield and overall performance. In 2018 and 2019, we got hit by some impairments on investments that did not pay off. So, the key things that we focused on were to understand why these didn’t pay off, what the challenges were and to fix them. What you’ll see this year is that we don’t have impairments at all coming in from our international divisions.

In fact, our international divisions are now growing because we have a better understanding of how to win in these spaces and build them up, and we took the decision to say we would not invest if we were just a pure equity investor. We will invest when we have a strategic capability on something that we get. Hence, we have to take the renewables business into our control in order to win.

The second thing is that a lot of businesses in Malaysia got hit by the same thing, which is MFRS (Malaysian Financial Reporting Standards). Things that were off balance sheet now get taken into the balance sheet, then you have to reclass and account for the difference in value. For me, at the moment, it is important to understand what the number says, but I also look at my cash positioning because the cash proxy, you can’t change. You can account for it differently, but the Ebitda (earnings before interest, taxes, depreciation and amortisation) portion is important. And if you look at our Ebitda, it has been doing well over the years, and that is a better proxy for us than just looking at pure accounting treatment of, when you bring things into the balance sheet, how does it look?

To make my balance sheet more efficient, we did sukuk this year. We took a longer-term sukuk because the cost of borrowing is very cheap. So, we were able to restructure the financing costs of Tenaga. The second we were able to do that, we had the capacity to reward our shareholders. So, when we looked at how to improve capital efficiency, we decided to give a special bonus this year. We declared it in March, paid in April and the dividend for the whole of last year was RM1. In cleaning up these things, we had the capacity and we can afford it. The cash is strong enough, the balance sheet is strong enough. It can be much more efficient, so we’re doing it.

What is your forecast or projections for Tenaga’s receivables?

In the latest six-month report, we put in around RM130 million of provisions for doubtful debts, mainly in anticipation of what had actually transpired during the economic slowdown. That is to be expected because some funding had ceased at that point of time. So, we enhanced our provisions during that period. What was surprising was that when we were going into the MCO period, we anticipated worse. We really anticipated that the market was going to freeze up on us, domestic and commercial, particularly the SMEs [that] were badly hit by the recession. It has turned out to be not as bad as we thought. Our collection numbers for the first three months were a lot better than anticipated. I actually had my guys prepare lines just in case we needed to up it, which we didn’t use because it didn’t get to as deep as we had thought.

Recently, there has been some concerns about the reliability of the electric supply in Sabah.

We have a subsidiary in Sabah. We are an 83% shareholder of Sabah Electricity Sdn Bhd (SESB) and the state owns the balance of 17%. We actually came in sometime back, when the government wanted us to help. The key challenge that everybody has in Sabah at the moment is that the framework model is not quite balanced yet because the system doesn’t pay for itself. The electricity tariff in Sabah is supported by subsidies from the federal government. The key challenge is, how do we change that to get the system much more balanced from the business model point of view? How do we get improvements into the Sabah network so that we get better efficiency so that we can improve reliability and so on? Ultimately, Sabah needs to be efficient and self-sustaining. It needs to pay for itself, without relying on subsidies because subsidies are not sustainable in the longer term. But you cannot turn it off overnight. So, in between, Tenaga will be committed to SESB to grow, to improve conditions in Sabah.

What are the reasons the system cannot pay for itself in Sabah?

The tariff is low and, fundamentally, because of the type of generation that they have — it is a small market. Sabah has 1.3gw, so to generate and distribute electricity is a challenge because it is a big state. And if you end up with small power plants, and you have different power plants with diesel and so on, then the cost is not commensurate with the system. We need to look at the grid holistically, how to drive down generation costs and transmission and distribution costs, so that we can narrow the gap. Second, we have to look at whether affordability needs to be in place and third, I think we also need to improve the system.

Meanwhile, one of the areas that we want to approach, last year we talked a bit about our fibre journey. We did a pilot in Jasin and we rolled out passes for 1,100 homes, and we were in the mode of converting that to a customer base by working with other players like Astro, Maxis, Digi, to sign up those customers. That journey has continued. So, now up to September, I think we have done 22,000 or so home passes and we have approvals to run all the way to about 140,000 home passes by next year, hopefully by the second quarter. So now, we have gone from a test mode to a player in that space. And because we have signed up Digi, Maxis and so on, we have ready marketers for us, where we connect that part. We participated in the bid for the MCMC’s (Malaysian Communications and Multimedia Commission) NFCP (National Fiberisation and Connectivity Plan) before they renamed it Jendela, so we are looking forward to finding out if we are successful or not. We think we are quite competitive, so that will give us even more expansions coming up.

That will be one of your key growth areas in five years?

It is a base for new business now. It is still early days, and we will see how it matures as we move along. The first most important [thing] was the proof of concept, where we actually can do it and now we are scaling up. With a partnership, we are finding that the pace of conversions is getting better. Since we have already identified 140,000 homes that we can pass, and plus the NFCP and so on, maybe in another two years, we will get close to 300,000 home passes. And then, it becomes interesting.

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