Maybank IB Research

PP16832/01/2012 (029059)

Sector Update

20 September 2011

Power
Neutral
(unchanged)

Projek Lekas, what it means to us

Get ready for higher tariff. This report aims to quantify the impact of importing liquefied natural gas (LNG) when PETRONAS re-gasification plant (LEKAS) is ready (expected July 2012). The imported LNG will be costlier than Tenagas current gas supply which is subsidized hence, power tariff must rise to reflect this. On the flip side, Tenaga will have greater certainty of supply and avoid further incidence of having to burn costly oil and distillates, like the episode experienced in 3QFY11. Gas is Tenagas only alternative. Tenagas primary power generation mix is via gas, coal and hydro. Coal and hydroelectric power plants are effectively at maximum capacity, and therefore, Tenaga has to rely on its natural gas plants to satisfy the demand growth. Unfortunately, gas supply from PETRONAS is limited due to the maturity profile of the domestic gas fields. With the upcoming new LNG terminal, Tenaga should have ample supply of gas and no longer face gas curtailments. LNG import to be 1.8-2.2x times costlier, we estimate. We think that the imported LNG will be priced according to the European and North Asia benchmark prices. This means that it will be 1.8-2.2x higher than the RM13.70/mmBtu that Tenaga currently pays for its natural gas supply from PETRONAS. Tariff to increase by 1.4%-1.7% p.a., to fully recoup the cost increase from FY13-15. This is assuming a constant coal price of USD110/mt, imported LNG price of USD10.0/mmBtu and a power demand growth assumption of 4.0% p.a.. This has yet to consider the RM3/mmBtu scheduled rise in domestic gas prices every 6 months announced in May 2011. This is in-line with our CPI forecasts, which suggest the people should be able to absorb this tariff increase fairly comfortably. A clear cost pass-through policy is imperative. The recent fuel cost past-through mechanism implemented by the Government should enable Tenaga to manage the situation effectively. However, the review period is once every six months (next review in Dec 2011) whilst the price of LNG fluctuates daily. This may suggest for Tenaga to buy forward and lock-in prices in order to mitigate risk and volatility. Projek Lekas has not been lekas (quick) enough. Our analysis confirms that using imported LNG is feasible and a worthy solution. However, it is two years late as Tenaga has already incurred the wrath of insufficient gas supply. In the past nine months (9MFY11), Tenaga has burnt RM1.7b by burning oil and distillates to generate power due to gas curtailment issues. This is more than half the total cost of Lekas.

Wong Chew Hann, CA wchewh@maybank-ib.com (603) 2297 8692

Summary of Recommendations
Price 19 Sep Tenaga Nasional Under Review 5.09 1.80 Target price Under Review 2.02 EPS (sen) FY11F FY12F 17.2 13.4 50.8 14.5 PE (x) FY11F 29.6 15.0 FY12F 10.0 13.9 EPS Growth (%) FY11F FY12F (70.6) (20.4) 195.5 7.8 Div Yield FY11F 3.2% 4.6

YTL Power* HOLD * FYE Jun Source: Maybank IB

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Current power generation mix in Malaysia

Hooked on gas. Currently, the bulk of the power generation mix is derived from gas at 46.9%. Assuming there has been no gas supply shortages in 2011, this figure would have been higher at 50.6% as there will be no oil or distillates consumed (oil and distillates are superbly expensive and are only used as the fuel of last resort).
Peninsula Malaysias power generation mix (Tenagas 9M FY2011, Sep 2010 to May 2011)

Oil,2.0%

Distillate,1.7 %

Hydroelectric, 6.3%

Gas,46.9%

Coal,43.1%

Sources: Tenaga, Maybank-IB

Coal maxed out, increasing reliance on gas. We believe this trend will continue as the coal power plants are close to maximum capacity. There are on-going developments to expand coal power plant capacity (Manjung and Tg Bin) but it will only be completed in 2015. This means that Tenaga must rely solely on natural gas power plants to satisfy the growing demand for power up till 2015. The charts below shows the utilization for coal and gas power plants based on nameplate capacity.
(Manjung and Tj Bin will add a total 2,000 MW to Peninsular Malaysias existing coal-fired capacity of 7,200 MW (+27.8%) and combined fuel mix capacity of 20,000 MW (+10.0%)). Coal power plants capacity utilisation
100% 80% 60% 40% 20% 0% 2005 2006 2007 2008 2009 2010 9M 2011 20% 73% 80% 67% 61% 60% 53% 40% 87%

Gas power plants capacity utilisation

80% 56% 59% 60% 58%
Gas curtailment issues

60%

54%

49% 43%

0% 2005 2006 2007 2008 2009 2010 9M 2011

Sources: Tenaga, Maybank-IB

Sources: Tenaga, Maybank-IB

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Projek Lekas overview

A re-gasification plant being built in Melaka for RM3b. To receive LNG and re-gas into Petronas Gas pipeline grid, a re-gasification plant and a receiving terminal (which includes storage tanks and marine facilities) are being built in Melaka at an estimated cost of RM3b. We believe the re-gas unit will be constructed onshore and supported by two floating storage tanks. The engineering and construction contract has been awarded to Muhibbah Engineering-Ranhill in Jan 2011 for a provisional value of RM1.07b with a July 2012 completion deadline. Malaysias gas economy. Malaysias entry to the LNG started in 1983 and it has swiftly grown in prominence to become one of the largest LNG exporters in the world. Malaysias geological natural gas reserves of 14.8b barrels of oil equivalent (boe) are estimated to last another 42 years based on current daily production rate of 974,000 boe. Malaysia, from LNG exporter to importer. Malaysia is a major natural gas exporter and is currently ranked as the third largest global LNG exporter. However, due to raising domestic consumption (+1.0% p.a. for past 5 years), production depletion on existing reserves, lack of new discoveries and committed forward sales, Malaysia has awoken to the fact that it does not have enough gas to supply its domestic needs. Gas importation has become a reality we cannot run away from; ironic for a gas producing country. 55% of Malaysias natural gas production is committed for LNG export, namely to customers in Japan, South Korea and Taiwan. This is a binding, non-revocable agreement and therefore alternative solution needs to be obtained.
Domestic gas production domestic versus export
(mmscfd) 3,200 3,100 3,000 2,904 2,900 2,800 2,700 2,600 2,500 2,400 2004 2005 2006 2007 2008 2009 2,500 2,436 2,635 2,516 2,509 2,536 Domestic consumption 3,115 3,013 Export 3,179 3,176 3,113

Peninsular Malaysias gas demand forecast (2010-20)

Sources: PETRONAS, Bintulu Port, Maybank-IB

Source: PEMANDU

LNG import is the long-term solution to feed growing gas demand. The first LNG import will be injected into the Peninsular Gas Utilisation (PGU) system by 2012 and up to 7m tpa of LNG will flow into the PGU by 2017. Project Lekas, which has a maximum send-out capacity of 3.8m tpa, is one of two re-gas plants to be built. 7m tpa of LNG equates to 1,000 mmscfd of natural gas, which would lift supply by more than 40% (2,200 mmscfd now). We are confident that with this added gas supply, Tenaga should no longer face gas shortage problems.

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LNG pricing structure

No real benchmark. Currently, the power sector enjoys subsidized gas of RM13.70/mmBtu revised on 1 June 2011 from RM10.70/mmBtu. There is no real benchmark for LNG price, as it is a regional specific market and the difficulty of transportation prevents it from becoming a true global commodity. As shown in the chart below, the price variance between Japan and UK versus Malaysia is 2-3x more. USA enjoys similar prices with Malaysia but this is an anomaly. There is currently a glut of natural gas in the USA due to the recent discovery of economical extraction of shale gas. Before the shale gas boom back in 2009, gas prices in the USA tend to be similar to that of Europe.
Global natural gas
USD / mmBtu
15.0 13.0 11.0 9.0 7.0 5.0 3.0 1.0 -1.0 Jun 2010 Aug 2010 Oct 2010 Dec 2010 Feb 2011 Apr 2011 Jun 2011 Aug 2011

Sources: Tenaga, Maybank-IB

LNG import will be 1.8-2.2x times costlier, we estimate. We believe that LNG will be imported from Qatar and Australia based on newsflow from PETRONAS. There is no indication as to which benchmark pricing will be used for the imported LNG. We think that the price will be between UK and Japan prices, and thus this means imported LNG will be 1.8-2.2x higher than the rates that Tenaga currently enjoys. Factors influencing pricing. There are various factors that influence the cost of LNG. Firstly, the x factor is the price that the gas field owner is willing to sell his LNG for. This can vary tremendously based on spot rates, and or indexed linked for long-term contracts. The cost of liquefaction and re-gasification are fixed cost components, and transport depends on distance and charter hire rates of the day.

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High cost of LNG is due to infrastructure logistics. Natural gas is complex and costly to transport. The most cost effective method is to consume it domestically via pipelines. In instances whereby pipelines do not exist or the destination is too far, natural gas is then converted into LNG to be transported via sea. The logistics cost as much as USD2.60-3.00/mmBtu which is 57%-66% of the current rate Tenaga pays for its presently delivered gas cost (of RM13.70/mmBtu).
Elements of LNG delivery system Process steps 1. Field development Natural gas is pumped from the earths crust to the surface. This varies tremendously based on the gas field profile. In summary, this is what the field operator earns for every unit of natural gas that is sold. Description Cost

2. Liquefaction Natural gas is cooled to -162C to transform it into a liquid state. Gas at this state is 1/600th of its original volume and is more economical to transport over long distances. This process is highly complex and consumes a lot of energy. The cost range of liquefaction is USD1.201.40/mmBtu.

3. Sea faring vessels LNG is transported in special doubled-hulled ships. The LNG is off-loaded as a liquid and pumped from the jetty to storage tanks at the terminal. The cost of transportation depends on the voyage distance and charter hire rates. We estimate it cost USD1.101.20/mmBtu for voyages from Qatar and Australia to Malaysia.

4. Re-gasification Re-gasification is to turn the LNG from a liquid form to a gas form. This is a simple process of heating the LNG to a boil. This is what Projek Lekas is about, there is a re-gasification plant being build in Melaka. Projek Lekas is estimated to cost RM3.0b for a 3.8m tpa capacity. Typically, the cost of re-gasification is USD0.30-0.40/mmBtu

5. Feed into Petronas Gas natural gas pipeline

The natural gas in a gaseous form; is pumped into Petronas Gas natural gas pipeline grid.

Petronas Gas charges based on industry sector and zones.

Sources: Perrys Chemical Engineers Handbook, Maybank-IB

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Tariff to rise
Ready or not, its coming. The chart below shows the cost of various types of fuel for power generation. LNG will be third most expensive fuel source after gas and coal. Tenaga management has reassured that PETRONAS will continue to provide 1,250 mmscfd of gas at a subsidized price of RM13.70/mmBtu. This however is still subject to the RM3/mmBtu upward revision every 6 months (next due in Dec 2011) until end-2015, as announced by the government in May 2011.
Tenagas fuel cost based on latest data
Sen/kwh 70 60 50 40 30 20 10 0 Gas LNG* Coal Distillate Oil
12.4
Electricity tariff = 33.5

57.4

59.3
Tenaga losses money

27.2 14.0
Tenaga makes money

* LNG is our estimate, based on feed-in cost of USD10/mmBtu @ RM30.0/mmBtu Sources: Tenaga, Maybank IB

Unit cost rise fairly mute. The table below shows our forecast fuel cost for Tenaga using FY12 as the base year. LNG consumption will start in FY13 and gradually increase with power demand growth. This will increase the aggregate fuel cost by 4.0% p.a. Fortunately, Tenaga will be able to offset some of this cost rise thanks to higher utilization rates that will lower unit cost from fixed cost portion. Our calculation derives power tariff must increase by 1.4%-1.7% p.a. in FY13-15 to fully recover the cost increase from higher priced LNG imports.
Tenagas average fuel cost
sen / kWh 20.0
4.3% 4.3% 3.9%

Extra cost from LNG and % rise in tariff to recoup cost

% growth 5% 4% 3%
1,000 RM million 2,000
1.7% 1,861 1.6%

% tariff 2.0%

16.0 12.0 8.0 4.0 FY12F FY13F FY14F

13.4

1,500

1.4% 1,174

1.5%

12.3

12.8

13.9

1.0%
514

2% 1% 0% FY15F
500 0.5%

0 FY12F FY13F FY14F FY15F

0.0%

Note: assume coal of USD110/mt, power demand growth 4.0% p.a Sources: Tenaga, Maybank IB

Sources: Tenaga, Maybank IB

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Sensitivity Analysis
Sensitivity analysis on core net income
RM million FY2011F 313 +1.2% n/a n/a FY2012F 329 +3.5% n/a n/a FY2013F 345 +1.2% 95 (0.3%) FY2014F 350 +1.2% 216 (6.2%)

+1% change in tariff

Impact on EPS

+1 USD change in LNG price / mmBtu *

Impact on EPS

* we estimate the first LNG import will take place in FY2013 Source: Maybank IB

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Definition of Ratings
Maybank Investment Bank Research uses the following rating system: BUY HOLD SELL Total return is expected to be above 10% in the next 12 months Total return is expected to be between -5% to 10% in the next 12 months Total return is expected to be below -5% in the next 12 months

Applicability of Ratings
The respective analyst maintains a coverage universe of stocks, the list of which may be adjusted according to needs. Investment ratings are only applicable to the stocks which form part of the coverage universe. Reports on companies which are not part of the coverage do not carry investment ratings as we do not actively follow developments in these companies.

Some common terms abbreviated in this report (where they appear):

Adex = Advertising Expenditure BV = Book Value CAGR = Compounded Annual Growth Rate Capex = Capital Expenditure CY = Calendar Year DCF = Discounted Cashflow DPS = Dividend Per Share EBIT = Earnings Before Interest And Tax EBITDA = EBIT, Depreciation And Amortisation EPS = Earnings Per Share EV = Enterprise Value FCF = Free Cashflow FV = Fair Value FY = Financial Year FYE = Financial Year End MoM = Month-On-Month NAV = Net Asset Value NTA = Net Tangible Asset P = Price P.A. = Per Annum PAT = Profit After Tax PBT = Profit Before Tax PE = Price Earnings PEG = PE Ratio To Growth PER = PE Ratio QoQ = Quarter-On-Quarter ROA = Return On Asset ROE = Return On Equity ROSF = Return On Shareholders Funds WACC = Weighted Average Cost Of Capital YoY = Year-On-Year YTD = Year-To-Date

Disclaimer
This report is for information purposes only and under no circumstances is it to be considered or intended as an offer to sell or a solicitation of an offer to buy the securities referred to herein. Investors should note that income from such securities, if any, may fluctuate and that each securitys price or value may rise or fall. Opinions or recommendations contained herein are in form of technical ratings and fundamental ratings. Technical ratings may differ from fundamental ratings as technical valuations apply different methodologies and are purely based on price and volume-related information extracted from Bursa Malaysia Securities Berhad in the equity analysis. Accordingly, investors may receive back less than originally invested. Past performance is not necessarily a guide to future performance. This report is not intended to provide personal investment advice and does not take into account the specific investment objectives, the financial situation and the particular needs of persons who may receive or read this report. Investors should therefore seek financial, legal and other advice regarding the appropriateness of investing in any securities or the investment strategies discussed or recommended in this report. The information contained herein has been obtained from sources believed to be reliable but such sources have not been independently verified by Maybank Investment Bank Bhd and consequently no representation is made as to the accuracy or completeness of this report by Maybank Investment Bank Bhd and it should not be relied upon as such. Accordingly, no liability can be accepted for any direct, indirect or consequential losses or damages that may arise from the use or reliance of this report. Maybank Investment Bank Bhd, its affiliates and related companies and their officers, directors, associates, connected parties and/or employees may from time to time have positions or be materially interested in the securities referred to herein and may further act as market maker or may have assumed an underwriting commitment or deal with such securities and may also perform or seek to perform investment banking services, advisory and other services for or relating to those companies. Any information, opinions or recommendations contained herein are subject to change at any time, without prior notice. This report may contain forward looking statements which are often but not always identified by the use of words such as anticipate, believe, estimate, intend, plan, expect, forecast, predict and project and statements that an event or result may, will, can, should, could or might occur or be achieved and other similar expressions. Such forward looking statements are based on assumptions made and information currently available to us and are subject to certain risks and uncertainties that could cause the actual results to differ materially from those expressed in any forward looking statements. Readers are cautioned not to place undue relevance on these forwardlooking statements. Maybank Investment Bank Bhd expressly disclaims any obligation to update or revise any such forward looking statements to reflect new information, events or circumstances after the date of this publication or to reflect the occurrence of unanticipated events. This report is prepared for the use of Maybank Investment Bank Bhd's clients and may not be reproduced, altered in any way, transmitted to, copied or distributed to any other party in whole or in part in any form or manner without the prior express written consent of Maybank Investment Bank Bhd and Maybank Investment Bank Bhd accepts no liability whatsoever for the actions of third parties in this respect. This report is not directed to or intended for distribution to or use by any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. Published / Printed by

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