MARC AFFIRMS TENAGA NASIONAL BERHAD'S ISSUER AND ISLAMIC DEBT RATINGS AT AAA AND AAAID RESPECTIVELY

RM2.0 billion Al-Bai' Bithaman Ajil Bonds

Select	Effective Date	Type	Currency Code	Rating	Action	Outlook	Watch
	30-Jan-2014	Long Term	MYR	AAA ID	Affirmed	Stable
	31-Jan-2013	Long Term	MYR	AAA ID	Affirmed	Stable

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 strength to reflect the high likelihood of government support premised on the company's critical role as the country's principal energy provider. The government support has been demonstrated by the cost-sharing arrangement amounting to RM1.1 billion for the financial year ended August 31, 2013 (FY2013) to reduce TNB's rising fuel cost burden in lieu of allowing a complete fuel cost pass-through to end-users. MARC's assessment of government support 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.

On a standalone basis, TNB's credit strength is underpinned by its dominant market share and sound operational track record as well as its prudent fiscal management and satisfactory debt service coverages. Moderating factors are its projected capital expenditure requirements which may lead to an uptrend in gearing level and potential reduction in debt protection measures in the near term. The growth of TNB's contingent liabilities could also place pressure on its consolidated financial profile.

MARC opines that the implementation of an electricity tariff hike of 14.9% effective January 1, 2014 in accordance with the incentive-based regulations (IBR) will largely address the long-standing issue of reconciling regulated tariff pricing and total cost recovery. Accordingly, the revised tariff structure will consist of two pricing components: fuel cost, which will capture fuel price fluctuations via an imbalance cost pass-through mechanism that revises fuel cost every six months; and a base tariff, which will allow TNB to recover any increases in the company's operating and capital expenditure associated with network system operations. Meanwhile, the tariff hike will incorporate the cost of imported liquefied natural gas (LNG) in addition to adjustments to domestic gas and coal reference price changes. MARC notes that a complete fuel cost pass-through would allow the company to fully recover its substantial fuel cost which accounted for a significant 19.5% of TNB's operating expenses for FY2013. While MARC views the improved visibility on pricing and cost recovery prospects favourably, some challenges could remain with respect to the new tariff regime. Tariff reform remains politically sensitive given that any sharp tariff increases would have a financial impact on households and businesses in general and therefore would be subject to public resistance.

For FY2013, TNB registered a consolidated operating profit margin of 15.9% (FY2012: 14.0%) in part due to lower coal prices which declined to an average of US$83.6 per metric tonne (MT) in FY2013 from US$103.6/MT in the previous year. Additionally, the cost of alternative fuel consumption decreased by 8.2% to RM2.6 billion (FY2012: RM2.8 billion) due to improved gas supply from imported LNG which resulted in lower utilisation of costlier alternative fuels. Net cash flow from operations increased to RM9.0 billion from RM8.5 billion in FY2012 due to a decrease in accounts receivable. In spite of negative free cash flow of RM725.9 million (FY2012: RM833.7 million) as a result of higher dividend payments and capital expenditure, TNB's cash and bank balances increased to RM9.5 billion in FY2013 from RM8.6 billion in the previous year. TNB made dividend payments of RM1.4 billion (FY2012: RM0.3 billion) and incurred RM8.5 billion (FY2012: RM7.3 billion) of capital expenditure mainly for system improvements and major power plant projects construction including RM3.1 billion for the ongoing construction of 1,000MW extension of the Manjung coal-fired power plant (Manjung 4) in Perak and two new hydroelectric power plants in Ulu Jelai and Hulu Terengganu.

In FY2013, TNB's credit metrics were increasingly weighed down by higher borrowings of RM1.6 billion by TNB Northern Energy Berhad for the construction of the Prai gas power plant and RM2.0 billion by Kapar Energy Ventures Sdn Bhd to refinance debt outstanding and for working capital purposes. In addition, the group registered higher finance lease obligations associated with the two independent power producers for which power purchase agreements have been extended. Total borrowings rose 20.3% to RM29.5 billion in FY2013 (FY2012: RM24.5 billion), resulting in an increased debt-to-equity ratio of 0.83 times (FY2012: 0.70 times). MARC believes TNB's borrowings will increase further to fund its newer power plant project for the construction of another 1,000MW extension to the Manjung coal-fired power plant (Manjung Five). Additionally, the growth of TNB's contingent liabilities which include liquidity support provided to its subsidiaries in the form of completion support and rolling guarantees on power plant projects remain a concern.

The stable outlook reflects MARC's expectations that TNB's core business functions will remain intact and will continue to receive very high government support for the utility to meet obligations for the ratings to be sustained in the next 12 to 18 months.

Contacts: Koh Shu Yunn, +603-2082 2243/ shuyunn@marc.com.my; David Lee, +603-2082 2255/ david@marc.com.my.