KUALA LUMPUR (July 1): The increase in piped-gas tariff for the second half this year (2H16) will be positive for oil and gas producer Petroliam Nasional Bhd's (Petronas) cash generation, while the impact on power utility Tenaga Nasional Bhd is likely to be neutral, Fitch Ratings said.

Fitch said, in a statement yesterday (June 30), Petronas will benefit from a more uniform application of the reforms addressing gas pricing in Malaysia.

Petronas's foregone gas sales revenue, as a result of regulated prices, from the power and non-power sector is significant, averaging around 20% of Fitch-adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) in the past three years.

Since the Malaysian government restarted the fuel cost pass through (FCPT) mechanism in January 2014, Petronas's piped-gas tariff to the power sector has increased by about 44% over four revisions, and its gas tariff to commercial and industrial customers has increased by about 68% over five revisions.

Since July 2015, the price revisions under the FCPT mechanism have taken place consistently once every six months.

"Petronas continues to maintain a strong standalone credit profile, which Fitch assesses at 'AA-'; however, the rating headroom for the company has shrunk due to pressure on operating cash generation from sustained low oil prices. Petronas has cut its dividend payout, but with oil prices likely to recover only slowly, operating cash flow is likely to continue being under pressure," it highlighted.

Meanwhile, Fitch does not expect the higher gas prices to have an adverse impact on Tenaga's credit profile, as the government allows Tenaga to adjust its regulated tariffs every six months to reflect the difference between actual fuel costs and the amounts stipulated in the FCPT framework, subject to its approval.

Moreover, Tenaga's over-recovery of fuel costs in the first half of 2016 — driven by improved utilisation of coal-fired plants, lower purchases of liquefied natural gas (LNG) as a result, and lower coal and LNG — more than offsets the announced increase in the piped-gas tariff to the power sector.

"Consequently, the regulator will maintain rebates and blended effective electricity tariffs in Peninsular Malaysia at 1.52 sen/kWh and 37.01 sen/kWh, respectively, for 2H16," it said.

Fitch assessed Tenaga's financial profile to be stronger than its standalone rating of 'BBB' in the absence of any major debt-funded acquisitions.

However, a ratings upgrade would be contingent on a record of the government consistently implementing the FCPT mechanism, especially in an environment of rising fuel costs.

In line with its subsidy rationalisation programme, the Malaysian government will increase the piped-gas tariff in 2H16 to the power sector to RM19.7 per million British thermal unit (mmbtu) (1H16: RM18.2/mmbtu), and to commercial and industrial users to RM27.05/mmbtu (1H16: RM25.53/mmbtu) in Peninsular Malaysia.