This article first appeared in The Edge Financial Daily on December 28, 2017 - January 3, 2018

KUALA LUMPUR: Tenaga Nasional Bhd’s (TNB) share price climbed further yesterday following the government’s decision to fork out RM929 million to subsidise electricity tariff for the first six months of 2018.

The government is also keeping the base tariff rate at 38.53 sen/kWh until 2020. This eases the concern of a reduction in the base tariff rate, which had put a cap on the utility group’s share price.

TNB’s share price closed at RM15.12, up 14 sen yesterday after it hit an intraday high of RM15.20.

However, uncertainty reigns on how the base tariffs would be maintained amid higher fuel costs, while there is little information on the return on regulated assets (RoA) apart from the fact that it would be between 7% and 7.5% in the latest review on the base tariff.

On the bright side, analysts see the government’s move to subsidise the electricity tariff as an indication of its commitment to the implementation of the Imbalance Cost Pass Through (ICPT) mechanism.

In this case, instead of allowing TNB to pass on the cost increment to consumers in the form of a higher electricity tariff, the government is bearing the extra costs in order to maintain the tariff at the current level from Jan 1 to June 30, 2018.

Analysts have reiterated their “buy” call on TNB in view of the latest announcement.

CIMB Investment Bank Bhd analyst Ngo Siew Teng said in a note to clients that while the base tariff remains the same, there is no clarity on the RoA, capital expenditure or operating expenditure that the government took into account when deciding on the base tariff.

“Tenaga has guided that the RoA should be within the range of 7% to 7.5% for RP2 (review period 2018 to 2020) compared to 7.5% for RP1 (2014 to 2017). [As such] we leave our forecasts unchanged for now due to limited information.

“We are positively surprised by the government’s decision to retain the base tariff when the market is expecting a reduction,” she added.

“Investors had been concerned over its potentially lower return on regulated asset, which would in turn reduce its base tariff and profitability.

“We believe this concern eased with the electricity base tariff rate unchanged at 38.53 sen/kWh until 2020,” said Ngo.

MIDF Research said under the new fuel price assumptions, ICPT in the first half of 2018 (1H18) is still effectively in a surcharge position of 0.28sen/kwh.

This means actual fuel cost incurred is higher under the recent review on base tariff.

It said although the exact details on fuel price assumptions for the current review on base tariff have not been released, it roughly simulated the impact of higher coal price and the US dollar assumptions.

“The decision whether to continue subsidising consumers beyond June 30 next year lies with the government but the fact that Tenaga has been kept neutral from the government’s subsidy decision in the past two reviews is positive in keeping the IBR (Incentive-Based Regulation) mechanism intact and ensuring Tenaga’s earnings stability,” it commented.