Tenaga Nasional Berhad (TENAGA) Earnings Call Transcript

Good evening, everyone. Thank you for joining us today for our briefing title, Briefing on Electricity Tariff Framework, recent development [indiscernible] Puan Shahannom Izham, Chief Regulatory and Stakeholder Management Officer; Puan Azlinda Binti Safian, Group Controller, Accounting and Reporting; and Senior Mohamad Fahmi Bin Japa, Head Strategy, Retail division. It is a great pleasure to welcome everyone to today's briefing. Today's briefing will begin with a presentation followed by a Q&A session, before we conclude the briefing. Before we begin, for those who may have questions during the session, please feel free to type them into the chat box at any time. We will address the questions during the Q&A session. Without further ado, I am pleased to invite Puan Azlinda Binti Safian to kick off our session for today.

Thank you, Edwin. Good evening, everyone. Firstly, thank you for joining us at a relatively short notice. I think we recognize that the announcement over the past few days has raised a number of questions among our investors and analysts, particularly around TNB's decision to absorb part of the AFA-related costs, the impact on earnings and perhaps more importantly, what this means for the predictability of TNB's returns under the regulatory framework. The government's objective is clear to provide an immediate relief to households that have seen higher electricity consumption, particularly during the recent hotter and hazier weather conditions. As Malaysia's National electricity utility, we understand that responsibility. So this -- our new tariff structure took effect on 1st July 2025. This is to reflect the actual cost of electricity supply. Due to the global fuel prices amidst the Middle East crisis, this has currently -- which is currently driving the increase in AFA. Coupled with weather-driven increase in electricity consumption, this has resulted in higher electricity bills for affected domestic customers. Following the Prime Minister's announcement on 17th September 2026, the protection threshold for domestic customer has been raised from 600 to 800 kilowatt hour per month for electricity consumed from 1st September to 31st December 2026. Today, we will recap on the new tariff structure and current conditions. We will look at the Prime Minister's and TNB's announcement and the impact to TNB and its outlook. Let me hand over to Puan Shahannom to take us through the slides, and then we will be happy to take your questions.

Thank you, Puan Azlinda. Salam Aleikum, and good afternoon, everyone. So the slide is a recapping of what happened last year during our tariff revision effective 1st July 2025, which the intention is to introduce itemized billing to reflect the actual cost of electricity along the value chain. In terms of cost recovery-wise, it is the same, whether it's prior to 1st July 2025 or effective 1st July 2025, whereby under the previous tariff structure, all costs by segment is being bundled. However, effective 1st July, we unbundled the cost to provide more clarity and transparency to our customers, whereby the charges is being itemized according to the 3 main cost structure, which are Generation segment, network segment as well as retail segment. Under the Generation segment, which is the biggest contributor in terms of cost recovery for TNB, we have 3 bill component, which is energy charge capacity charge as well as AFA or automatic fuel cost adjustment. Next, Okay. This is 70% of electricity supply where it consists cost of generation. The balance 30% comes from network and retail costs. The parameters that is embedded under our current tariff structure, whereby coal base rate is USD 97 per million tonne, gas based on Tier 1 and Tier 2 price, respectively, at MYR 35 per MMBtu and MYR 46 per MMBtu, and our ForEx is set at MYR 4.307. So what happened in September 2026, our coal price increased to USD 122.85 per metric ton, whereas gas increased for Tier 2 from 46 to 57. However, we are blessed with a stronger ForEx at 4.0944. So these key parameters has been affecting our offer, whereby TNB has introduced a surcharge offer to ensure recovery of our generation costs. So under this AFA mechanism, the most important part will be the protection for domestic customers using up to 600 kilowatt hour per month, whereby they are exempted from all discharges, which was initially said that 85% of domestic consumers are protected from this AFA. All right. What we see from the trending of customer usage, the earlier intention of protecting 86% or 85% of the customers has been reducing because customers use a lot more electricity for the past few months, whereby based on the current mechanism set at threshold level of 600 kilowatts, the outcome is that as at August, only 80% of the domestic consumers is being protected under the threshold level of 600 kilowatt hour per mine. The increase is consumption is contributed by many factors, among others, the temperature, the increasing temperature, staying more at home due to work-from-home policy as well as holidays, workup and et cetera. So this has been the main issues raised by our consumers because many customers seen increase in their electricity bill, not only because the consumption is higher, but also because they have crossed 600-kilowatt hour band. And with this cross and ban resulted in additional bill component in customers' electricity bill that are far service tax and also retail charges. Next. Okay. This is some historical perspective of how our offer looks like for the past few months. Since July 2025, up until April 2025, AFA has been in the form of rebate to our consumers because fuel cost is below what we set in our base tariff. The total rebate given to customers during this period amounts to about MYR 3.1 billion. However, due to the crisis in Middle East, the fuel cost has increased. And effective May 2026, customers has been seeing surcharge of AFA in their electricity bill. To date, the total surcharge amounts to about MYR 0.8 billion. However, to cushion the impact to our customers, government has also contributed about MYR 435 million, taking the fund from KUI to cushion increase in AFA from May to August 2026. Next, this is what has been announced by Prime Minister last week. With the new extension of the threshold level from 600-kilowatt hour to 800 kilowatt hour to protect the domestic consumers effective from September to December 2026. This increased the protection up to over 8 million domestic customers or up to about 90% of our domestic customers, additional protection to about 1 million consumers. So those using up to 800 kilowatt hour per mine is now exempted from AFA, service tax and also retail charges. Based on this exemption, we estimate that TNB will absorb about MYR 120 million to MYR 150 million of the AFA difference during this additional protection. plus the retail charges. When we estimate the numbers, this is based on a high case scenario. And we expect that the actual number may be less than the one presented here. So we have been taking a very conservative number, whereby we took the highest fuel prices for the past few months as well as rent outlook moving forward. Okay. Next. Okay. What the customers will see in their electricity bill, this is an illustration. For example, before the new policy, if customers consume 500 kilowatt hour per month, the bill will be about MYR 165 per month. However, because of the factors mentioned earlier, -- some of the customers have seen a steep increase in their electricity bill when they use about 700 kilowatt hour per month, whereby they see an increase in their electricity bill of about MYR 40 because, first, they have to pay for the additional consumption at the energy capacity and network charge, plus the 3 additional bill component where they have not been seen in their previous electricity bill that RT charge, AFA and service tax. So for this example, the increase is about MYR 40. However, with the extension of the new threshold level to MYR 800 the customers will see a lower bill for using the same amount of electricity at 700 kilowatt hour per month, which is effectively a reduction of about 13%. However, the bill is still high as compared to the initial usage of 500 kilowatt hour per month. Next. Okay. Thank you. So this will be a one-off cost adjustment that Kanaga will absorb. Even on the high side of $150 million, this is still manageable. More importantly, this is temporary and targeted. It does not change the underlying AFA mechanism or the fundamental economics of the TNB's regulated business. We will be transparent about any policy-related financial impact while we continue to protect the long-term sustainability and predictability of TNB. And we will continue to honor our dividend policy as we have done while committed to deliver value to our shareholders. Okay. Now we can take questions, Edwin?

Thank you, Puan Shahannom and Puan Azlinda, for your presentation. We will now transition into the Q&A session. We have a question here. It's Noah from Tenaga Nasional Berhad. So the question reads, given that there is a delay in the reflection of global fuel, which is gas -- coal and gas prices within the AFA rates and the predicted December AFA rate stands at $0.058 per kilowatt, does TNB foresee that this rate will continue in 2027?

Thank you, Noah. We mentioned before that Tenaga's, what we are absorbing is only from September to December. If we look at the Singapaya website, it's also stated that the fuel prices are actually on a down trend. It looks like the fuel prices are stabilizing. From January onwards, I think we -- the government is working on a more permanent solution to resolve the temporary design gap.

We have another participant who has his questions ready. Isaac. So the question reads, comparing 2021 and 2022 to now, why did TNB decide to absorb the rising fuel cost this time, but not in 2021 and 2022?

I think if we remember, Tenaga has absorbed this kind of costs in the past during COVID. So similarly, during that time, it was extraordinary circumstances. So this is also the same where the government has shown that there is a need to assist the public with the high weather and the high fuel prices.

Another participant who has this question, Ahmad from Nomura. How does this change the revenue gap and price cap in regulatory adjustment?

This adjustment is completely separate from the regulated return. Our WACC is still intact. The regulated return is still intact. This is a one-off outside the regulatory framework.

We also have Max from RHB. He has 2 questions. The first question is, can you share the individual fuel cost assumption, example, coal, gas price and ForEx for MYR 120 million to MYR 150 million one-off cost adjustment. The second question is, is there a possibility for tax exemption for this one-off cost adjustment?

All right. So the assumption we use up to MYR 150 million is based on the high side of the fuel prices, whereby Brent is at USD 110 per barrel. For coal price hovering about MYR 136 to MYR 138. For gas, we estimate it can go up until MYR 74 per MMBtu for LNG and ForEx is at 4.2. That is assumption that we use, which is a bit on the high side to ensure that we have some buffers.

On the tax, yes. So this will impact the total revenue for the group. And yes, there is a tax reduction in tax, Max.

Okay. Next, we'll move on with this other participant, Hazmy from CLSA. The question reads, should we assume that Kui fund is now running thin and hence, why Tenaga need to absorb the cost this time around?

Actually, this is based on a shared basis. We believe that the Kui is still there because moving forward, as per what we have been practicing earlier, the government would still be cushioning some of the AFA should it increase too high to ensure affordability of the R. Okay. Maybe I can add one more. I forgot just now. The amount that we absorb is about -- for the 3 months period is only about 6% of our estimated AFA moving forward. So this is quite a small amount actually as compared to the forecast actual AFA cost -- additional AFA costs moving forward.

All right. Right. So we'll move on to next, which is from Laban Reinsurance Ltd. He has 2 questions. Number one, will the MYR 120 million to MYR 150 million cost adsorption continue in 2027? If yes, will the significant impact its earnings in FY 2027?

Based on the current concurrent with the government, TNB will absorb this as a one-off relief to our customers up to December 2026 only. Beyond that, the government will relook at the AFA mechanism for a more sustainable policy moving forward.

His second question is, why does Tenaga decided to absorb the MYR 120 million to MYR 150 million in AFA? Is it because fund is insufficient? Is this the first time?

We have answered this question just now. It is a shared cost and the estimated sharing is only about 6% of the total AFA projection moving forward.

Next, we have Rachel Tan from UBS. Assuming a period of sustained increase in fuel price, how can we be sure that Tenaga will not continue to absorb the cost? What exactly needs to be resolved going forward in order for the cost to be fully passed through?

We believe that the current AFA mechanism is still intact because the current relief is only a one-off assistance to our customers. And based on our discussion with the government, they are already looking at the new framework beyond December 2026.

Next, we have CJ from AIA. Any indications on the balances of fund?

Sorry, we don't have any indication that is governed by Energy Commission.

We also have a question from Joe Lam from Aberdeen. The question reads, is the KUI fund depleted?

We don't have that information, but we can see that the current government keep on cushioning the impact of AFA from time to time.

There seems to be a reply from Ahmad from Nomura. So Ahmad's question reads, how does this change the revenue cap and price cap regulatory adjustment? So we have answered that. He replied with, okay, let me make it clear. Based on the revenue cap adjustment, if revenue exceeds threshold, then TNB will need to return back to regulator. Similarly, in the opposite applies. In the case there is a revenue shortfall, then there will be a regulatory revenue, same like FY 2025. So this applies, right? As the higher threshold of 800 kilowatt per hour will mean lower revenue collection. And in the event it is below the threshold, then there will be a regulatory adjustment, correct?

No, Ahmad. This will be an adjustment that we do not do in the regulatory framework. So this is an adjustment that we do at corporate. So it's similar to a contribution.

We will move on to the next question. So we from TA Securities. Can you share what are the key aspects of the AFA that you are being reviewed?

At the moment, we don't have that clear visibility at the government level, but we will need to understand that January onwards, the government will have a new policy for AFA.

Next, we have Ari from EPF. Will this impact TNB's credit rating by both domestic and global credit rating agencies? Are there any preliminary feedback from the credit rating agencies?

At the moment, we do not believe that this will impact our ratings, and we have not gotten any indication accordingly because I think. But like some of you have also noted that this amount on -- even on the high side is still very small in comparative to our earnings.

Moving on, Max from RHB has a follow-up too. When you mentioned that the government is looking at a new framework in 2027, does that mean that we might revert to 6 months or perhaps 3 months fuel cost adjustment versus monthly cost adjustments to reduce tariff adjustment frequency?

I believe it will not happen because AFA will still remain intact as it is. But if you look previously how ICPT works, they have differentiated ICPT. So I'm not sure maybe that would be one of the solution moving forward if that can give you some comfort level.

We also have another participant who also have a follow-up. So Hazmy asks, how should we think about the impact of this development to the upcoming RP5 submission and discussion?