RAM Ratings reaffirms TNB's AAA debt rating

RAM Ratings (20 May 2011): RAM Ratings has reaffirmed the AAA rating of Tenaga Nasional Berhad’s (TNB or the Group) USD500 million equivalent Murabahah Medium-Term Notes Programme (2005/2025); the long-term rating has a stable outlook.

The rating reflects TNB’s position as Malaysia’s national electricity company, with a near-monopoly over the transmission and distribution of electricity across Peninsular Malaysia and Sabah. TNB also plays a crucial role as the sole-off-taker for the generating capacity and electrical energy produced by all the independent power producers (IPPs) in Peninsular Malaysia. Meanwhile, the Group remains a dominant player in the domestic power-generating business, controlling 53% of Peninsular Malaysia’s generating capacity despite the growing presence of IPPs in the past decade.

In view of the strategic nature of TNB’s role as Malaysia’s national electricity company, it enjoys strong implicit support from the Government, i.e. its major shareholder. Previous tariff reviews - which had helped the utility giant pass on its rising coal costs to consumers - and subsidised gas prices underline the implicit support received by TNB.

As at end-August 2010, TNB’s balance sheet was weighed down by its hefty RM21.26 billion debt burden. As half of this was denominated in Japanese yen and US dollars, the Group is exposed to fluctuations in foreign-exchange (forex) rates. Nonetheless, we recognise the improvement in TNB’s key financial metrics after the Group trimmed its debt level from nearly RM30 billion 5 years ago; as at end-August 2010, its gearing ratio had eased to 0.74 times. After including its heavy debt load from the fixed capacity-payment obligations under the Group’s Power Purchase Agreements (PPAs) with the various IPPs, its adjusted gearing ratio climbed up to 1.74 times while its adjusted funds from operations debt coverage stood at 0.23 times as at end-August 2010.

Given the increasing dependence on coal-powered generation – which accounted for 40.2% of Peninsular Malaysia’s generation mix in FY Aug 2010 compared to 28.6% the previous corresponding period – TNB remains vulnerable to unfavourable movements in coal prices and forex rates, as supply is procured at international prices. As coal costs already represent more than half of its total fuel costs and in view of still-rising coal prices, the Group’s margins will face further downward pressure. Nevertheless, the impact of heftier generation costs may be moderated by the stronger ringgit against the US dollar.

Full article: www.ram.com.my