Tenaga (1)... Oct 2008

TNB wants independent power producers (IPPs) to renegotiate and revise downwards their power pacts with the utility company, stressing that they will be dragged down too if its finances collapse.

RM22 billion of loans versus less than RM10 billion debts owed by the IPPs in the country. If TNB collapses, the IPPs will also collapse and bring with them another RM22 billion of (TNB) debts.
TNB has long complained that the power purchase agreements (PPAs) it has with the IPPs were lopsided and a financial burden. That burden is being passed on to consumers in quantum never seen before. Rather, the latter - some of which had proclaimed that they were efficient - should pass on some of the efficiency gains to consumers to ensure equality or level-playing field.

Industry observers said TNB's financial viability depends on its ability to pass on the PPA burden, but there will be a limit to how much can be passed on to the consumers. Eventually, TNB's financial viability will be adversely affected to a greater degree than it is now (2008).

Meanwhile, industry estimates putting TNB's planned two hydro-electric plants at a combined cost of RM4 billion. TNB has enough money for now (2008) to fund the projects and that they were on track to be completed in 2012. TNB is to build a 212-megawatt (MW) plant in Hulu Terengganu and a 372MW Ulu Jelai hydro-electric plant in Pahang.

TNB will discuss more with the government on the Bakun project in Sarawak, although it had already started preliminary works on the dam.

Financial Results …

Tenaga Nasional Bhd posted net loss of RM282.9mil for the fourth quarter ended Aug 31 2008 compared with net profit of RM168.4mil a year ago following higher coal prices and weaker ringgit compared with the US dollar and yen.

Revenue rose to RM7.09bil compared with RM6.12bil. Loss per share was 6.53 sen compared with earnings per share of 3.89. It proposed dividend of 10 sen per share compared with 16.3 sen a year ago.

Operating profit shrank to only RM259.4mil, sharply lower than RM1.2bil a year ago, weighed down by sharply higher operating expenses of RM6.98bil (from RM5.11bil a year ago). It recorded foreign exchange translation loss of RM288.8mil compared with the higher RM549mil a year ago.

For the financial year ended Aug 31 2008, net profit fell to RM2.59bil from RM4.06bil a year ago, despite that FY08 revenue rose to RM25.75bil from RM23.32bil. Its operating profit for FY08 declined to RM4.04bil compared with RM5.54bil in FY07.

Operating expenses in FY08 rose by 22.5% (RM4.13bil), mainly due to higher capacity payments to independent power producers and higher energy costs including coal.

Going Forward …

The Ministry of Energy, Water and Communications (MEWC) is calling for an external audit of Tenaga Nasional Bhd’s (TNB) three core businesses - generation, transmission and distribution, say sources. Towards that end, it is learnt that the Energy Commission, will very soon, by end of this month or early next (Oct – Nov2008), call for tender among local and international consultants on the job.

At the moment, all three businesses are lumped together ... but the ministry wants to be able to look at and assess the individual sectors, how they are faring and their efficiency levels. The ministry wants to be transparent to consumers.

According to sources, the tender document is currently (Oct 2008) being fine-tuned. The aim is to appoint a joint-venture consortium which comprises local and international consultants for the job.

Sources say that once the study is done, it may be easier to defend (or otherwise) the need to raise electricity tariffs for TNB. The process needs to be more transparent. If the Government is going to ask consumers to pay more for electricity, then everyone needs to know whether or not TNB and its core businesses are performing efficiently. The people deserve transparency.

The move is likely to ruffle the feathers of the national utility, already faced with its own set of woes of waning electricity demand, frustratingly high payouts to independent power producers and soaring fuel prices. Already, this potent combination has left its prints on TNB’s fourth quarter FY08 scorecard which saw it slip into the red.

Industry observers said it is rather unusual move and seems rather ad hoc. The industry is facing a whole lot of challenges across the board. It would be better to work on broader strokes first and then tackle them one by one, rather than initiate stand alone, piece-meal initiatives.

Yet, the idea resonates with some others … it is a valid point that the cost structures and so forth of TNB’s individual core businesses are examined and where there is room for improvements, necessary measures are taken, particularly if there is going to be tariff adjustments on a regular basis. If consumers have to fork out more from their pockets, then maybe there ought to be more transparency in what goes into or out of TNB’s pockets.

According to TNB’s latest annual report (2007), the three subsidiaries - TNB Generation Sdn Bhd, TNB Transmission Network Sdn Bhd and TNB Distribution Sdn Bhd are referred to as wholly owned dormant subsidiaries. In TNB’s notes which accompanied its recently revealed FY08 results, the company stated: “As the principal activities of the group are the generation, transmission, distribution and sale of electricity in Malaysia, segmental reporting is deemed not necessary.”

Is the EC acting within its jurisdiction to call for a tender among consultants for an audit on TNB’s three core businesses? Does it really have such powers? Can TNB resist the move?

Therein lies another problem with the already challenge-ridden power sector in the country. The regulatory framework in the country’s power sector is screaming to be re-examined as there appears to be overlapping jurisdictions among the Economic Planning Unit, the MEWC and the EC.
The EC describes itself as the regulator for the electricity and gas supply industry with powers provided for in the Energy Commission Act (2001) and other related acts. So far, since its inception in 2001, the EC does not appear to have made any visibly significant strides in ironing out the creases in the industry, nor has it appeared to have played a crucial role in key decisions affecting the industry.

The EC is supposed to be an industry regulator. However it appears to have no teeth at the moment. A lot of the job is actually being done by the EPU which oversees the power purchase agreements, plants up and so forth. It’s a messy structure and one that is convoluted.

Then, there is Khazanah Nasional Bhd owned by Ministry of Finance which is TNB’s major shareholder. It wouldn’t be a surprise if Khazanah, led by Tan Sri Azman Mokhtar has his own set of ideas on how the power industry ought to be restructured. In fact he told reporters that Khazanah will submit a detailed study to address the structural problems of the country’s electricity industry to the Government: There are structural issues at TNB and indeed structural issues in the electricity sector ... it is not an exaggeration to say, it is a ’time bomb’ for the country.”

For the fourth quarter ended August 2008, it slipped into a net loss position of RM282.9mil on the back of a 16% rise in revenue. The culprits were not surprising higher payouts to independent power producers and soaring fuel prices. TNB’s payouts to IPP rose 22.4% in 2008 largely as a result of higher capacity and energy payments to Tanjung Bin and other fuel-related costs. Coal prices have shot through the roof this year (2008), in tandem with the exuberance in most other commodities. Coal prices for the financial year (averaged out) was almost double that of the previous year at US$76.40/tonne in 2008 versus US$45.30/tonne in 2007.

The future appears no less dim and even as the coal cost pressure appears to be easing (but still high), there are other behemoth challenges for the utility. The utility’s payouts to IPPs is set to get higher in FY09. The first 700MW unit of Jimah is scheduled to be commissioned in January 2009 and the second unit in July. That is likely to bump up capacity payments by RM200mil in FY09 and RM1bil in FY10.
Against a backdrop of a cooling economy, electricity demand is also likely to slide or remain muted amidst weak exports and slowing construction activities.

TNB’s foreign shareholding, which probably echoes that of many companies on Bursa Malaysia, has also slipped dramatically from a peak of 28% in May 2007, it has fallen to 16% as at September this year (2008).