MARC has affirmed Tenaga Nasional Berhad's (TNB) issuer rating of AAA and Islamic debt rating of AAAID for the outstanding RM2.0 billion Al-Bai' Bithaman Ajil Bonds

MARC has affirmed Tenaga Nasional Berhad's (TNB) issuer rating of AAA and Islamic debt rating of AAAID for the outstanding RM2.0 billion Al-Bai' Bithaman Ajil Bonds. The outlook on the ratings is stable. The ratings continue to incorporate an uplift from TNB's standalone credit assessment and fundamentally represents the high likelihood of support from the government premised on the utility's critical role as the country's principal energy provider. The support uplift also takes into account the government's indirect majority ownership in TNB and its golden share in the utility which allows the government to veto any actions by the company which require shareholders' approval. TNB's standalone credit strength continues to be supported by the utility's prudent management of its capital needs and debt profile, and satisfactory debt service coverage, as well as its sound operational track record. These positives are moderated by its exposure to incomplete pass-through of fuel costs, in particular its reliance on regular rate increases or interim cost sharing arrangements to maintain its balance sheet strength and sound debt service coverage.

The utility's financial performance and financial flexibility have historically dependent on regular rate increases, and more recently cost compensation to support debt service and anticipated capital needs. As at August 31, 2012, the utility recognised compensation totaling RM3.15 billion from the government and national oil and gas company Petroliam Nasional Berhad (PETRONAS) for the use of oil and distillate from January 2010 to August 2012, of which RM2.40 billion cash has been received. The utility posted a sharp rebound in its pre-tax profits for the financial year ended August 31, 2012 (FY2012). With the commissioning of the forthcoming Lekas Regassification Terminal which is expected to commence operations in the first half of 2013, MARC believes that gas supply risk will be largely mitigated; however, the issue of fuel cost pass-through remains unresolved. 

There is continuing uncertainty in cost recovery with respect to the higher-priced imported liquefied natural gas (LNG) in light of the government's long-term plans to align local gas prices closer to that of international prices. The rising fuel costs could present a challenge for TNB in the near-to-medium term given constraints on its ability to adjust its generation fuel mix in the near-to-medium term. The delay by the government in the rationalisation of gas prices and approval of tariff hike(s) raises concerns over the cost recovery process and TNB's ability to sustain its credit metrics in line with MARC's expectations. A key driver underlying MARC's decision to affirm TNB's ratings is the rating agency's expectation of satisfactory cost recovery protection for the utility and continued commitment on the part of the government to support TNB's credit worthiness.

In FY2012, TNB's revenue increased by 11.2% to RM35.8 billion (FY2011: RM32.2 billion) due to the full-year realisation of the revision in electricity tariffs since June 2011 and electricity demand growth of 4.3%. The aforementioned compensation and downward trend of coal prices towards the second half of FY2012 have also improved TNB's operating profit margin to 17.8% (FY2011: 5.6%). Average coal prices moderated to US$98.3/MT in the second half of FY2012 compared to US$111.9/MT in the previous year's corresponding period and prices are expected to stay below the US$100/MT mark in the near term. Consequently, the utility's net cash flow from operations increased to RM8.48 billion (FY2011: RM5.10 billion), which continues to support TNB's capital expenditure of RM7.34 billion (FY2011: RM5.59 billion). However, TNB is expected to continue to investing heavily in its power plant projects, the Hulu Terengganu and Ulu Jelai hydroelectric power plants (collectively RM3.5 billion), the RM5.0 billion 1,000MW Janamanjung coal-fired power plant expansion and its recently awarded RM2.5 billion Prai power plant. The ongoing capital expenditure is expected to further increase TNB's debt-to-equity which has risen to 0.67 times in FY2012 from 0.64 times in FY2011.

The stable outlook reflects MARC's expectations that TNB's persisting importance as the country's largest electricity utility should ensure a very high likelihood of full and timely government support for TNB's obligations to sustain the ratings in the next 12 to 18 months.

Contacts: Jason Kok, +603-2082 2258/ jason@marc.com.my; David Lee, +603-2082 2255/ david@marc.com.my.

January 31, 2013