MARC AFFIRMS TENAGA NASIONAL BERHAD'S ISSUER AND LONG-TERM DEBT RATINGS OF AAA AND AAAID RESPECTIVELY; OUTLOOK STABLE

Apr 18, 2012 -

MARC has affirmed Tenaga Nasional Berhad’s (TNB) issuer rating of AAA and the utility's Islamic debt ratings at AAAID for the following outstanding issues: i) RM1.0 billion Al-Bai’ Bithaman Ajil Notes Issuance Facility; and ii) RM2.0 billion Al-Bai’ Bithaman Ajil Bonds. The outlook is stable. The affirmed ratings continue to incorporate support uplift for TNB's obligations, deriving from its key role in the national energy policy as the country's principal energy supplier. The fully integrated electricity utility operates Malaysian’s national grid and accounts for 48.3% of the generation output in Peninsular Malaysia. MARC’s support assessment also considers TNB’s status as a government-controlled entity and the Malaysian government's golden share in TNB which carries veto power over major decisions at the company. The ratings are further supported by TNB’s stable revenue base, sound operational record and strong financial flexibility.

Rating stability is underpinned by TNB’s continuing economic importance which should ensure a high degree of government support to sustain current ratings going forward, notwithstanding the persisting challenge of securing sufficient and timely tariff increases to cover the cost of supply. MARC acknowledges the challenges that continue to confront TNB stemming from domestic gas supply shortages and the high import costs of natural gas. TNB’s operating profitability and debt service coverage weakened notably for the financial year ended August 31, 2011 (FY2011) as a result of the curtailment of gas supply. MARC expects continued pressure on the utility’s credit metrics in the absence of mitigating developments with respect to its exposure to volatile and rising fuel prices.

In FY2011, TNB’s revenue grew by 6.2% to RM32.21 billion (FY2010: RM30.32 billion) due to steady electricity demand in Peninsular Malaysia and Sabah in line with the country’s GDP growth and an upward revision in electricity tariffs on June 1, 2011. The natural gas curtailment resulted in TNB switching to oil and distillates which are priced about five times higher than the price of subsidised natural gas. This led to a significant reduction in EBITDA margin from 26.8% in the previous year to 16.1% in FY2011. Based on MARC’s estimates, the usage of oil and distillates in place of natural gas is expected to cost TNB an approximate additional RM10 million per day. MARC views the recent sharing of oil and distillate costs among TNB, PETRONAS and the Malaysian government between January 2010 through October 2011 an interim measure to reduce financial pressure on TNB arising from the on-going gas curtailment. TNB is still expected to face gas supply shortages until the commissioning of Malaysia’s first liquefied natural gas (LNG) import terminal in Melaka by September 2012.

Post commissioning of the aforementioned LNG import terminal, MARC is mindful that TNB will need to purchase the imported natural gas at market prices which are about four times higher than the current subsidised gas prices of RM13.70 per million metric British Thermal Units (mmBTU). Although the government announced in June 2011 a new fuel cost pass-through (FCPT) mechanism for the power sector, it remains to be seen whether there will be full pass-through of fuel costs increases in the end-user tariff during subsequent semi-annual reviews. The last annouced electricity tariff had reflected an upward revision of natural gas prices to power sector by 28.0% to RM13.70 per mmBTU while maintaining the coal costs at its existing tariff-compensated level of USD85 per metric tonne (MT), a level unchanged since March 2009. In FY2011, in addition to the higher cost of oil and distillates, TNB incurred further USD414 million in burning coal due to the increase in average coal price to USD106.9 per MT from USD88.2 per MT in FY2010. Capital expenditure on ongoing projects, system improvements and new supply works which increased by 31.3% to RM5.59 billion (FY2010: RM4.26 billion) had, in addition, to its lower operating cash flow generation, resulted in negative free cash flow of RM2.02 billion in FY2011 (FY2010: positive RM3.35 billion). TNB’s cash and bank balances declined to RM3.95 billion (FY2010: RM8.34 billion) consequently.

TNB’s debt-to-equity ratio improved to 0.63 times (FY2010: 0.70 times) as the group pared down its borrowings by RM2.17 billion during the year through repayments and repurchase of existing borrowings. In view of the group’s upcoming capital expenditure plans, including the RM6.6 billion 1,000MW Janamanjung expansion and RM4.3 billion planned hydroelectric projects in Ulu Jelai and Hulu Terengganu, TNB’s borrowings are expected to increase until FY2015, in light of its projected annual capital expenditure of RM4.5 billion excluding these new power plants.

While a more transparent and predictable tariff process would be desired as opposed to ad-hoc adjustments and/or cost relief to offset cost pressures as recently seen at TNB, MARC continues to maintain its view that full and timely support for TNB’s obligations would be forthcoming from the Malaysian government when required. However, as the form and timing of recent support suggests, TNB's credit measures will be subject to greater volatility and will likely to remain under pressure over the immediate term.

Contacts:
Ahmad Tajuddin Yeop Aznan, +603-2082 2256/ tajuddin@marc.com.my;
David Lee, +603-2082 2255/ david@marc.com.my;
Sandeep Bhattacharya, +603-2082 2247/ sandeep@marc.com.my.