RAM Ratings reaffirms TNB’s AAA sukuk rating

Published on 22 April 2014

RAM Ratings has reaffirmed the AAA/Stable rating of Tenaga Nasional Berhad’s (TNB or the Group) USD500 million equivalent Murabahah MTN Programme (2005/2025). Based on RAM’s methodology on government-linked entities, there is a very high likelihood of extraordinary government support for TNB in the event of financial distress, given the Group’s crucial role as the national electricity company. The rating reflects TNB’s strategic position and its near-monopoly on the transmission and distribution of electricity across Peninsular Malaysia and Sabah.

The Group also plays a critical role as the sole off-taker of the generating capacity of and electrical energy produced by all independent power producers (IPPs) in the peninsula. The Group remains a dominant player in the domestic power-generating business, controlling 53% of Peninsular Malaysia’s generating capacity as at end-August 2013; this will increase to around 61% between 2015 and 2019.

The Government, in addition to holding a special share, together with its various agencies owns an aggregate 67%-stake in TNB. Subsidised gas and periodic tariff reviews underline the implicit government support received by the Group. Meanwhile, explicit financial support from the Government has taken the form of cash compensation for additional fuel costs incurred during the period when the industry faced a gas shortage, before the commissioning of the liquefied natural gas regasification plant in Melaka. 

More recently, the Energy Commission launched an incentive-based regulation (IBR) to govern the setting of electricity tariffs in Peninsular Malaysia, with 2014 being the initial trial period. As part of the framework, an imbalance cost pass-through mechanism will address fluctuations in fuel costs, where all fuel-related and other generation specific costs will be reviewed every 6 months to reflect market prices as well as any change in the regulated gas price. Based on this mechanism, TNB’s electricity tariff for the peninsula was adjusted to 38.53 sen/kWh (+14.89%), effective 1 January 2014. While the sustainability and continuity of implementation of the IBR remains to be seen, it signals an overall advantage for the Group in terms of tariff adjustment, and thus, should help preserve the utility giant’s long-term financial profile. This reinforces our expectation of solid and consistent government support for the Group, given its critical role.

Although TNB’s debt level remained relatively constant at RM23.00 billion as at end-November 2013, the Group’s adjusted gearing ratio (after considering capacity payments made to IPPs) had eased to 1.33 times due to profit accumulation, albeit remaining high. The Group’s adjusted funds from operations debt coverage remained healthy and relatively unchanged at 0.25 times in FY Aug 2013. Meanwhile, its free operating cashflow debt coverage continued to improve, indicating TNB’s ability to fund capex internally. Nevertheless, as a result of the nation’s initiatives to raise its power-generation capacity going forward, the Group’s leverage is envisaged to augment, either via an additional drawdown of debt to fund the construction of power plants for which it recently won contracts, or through adjustments for additional capacity payment obligations to new IPPs. TNB remains moderately exposed to fluctuations in forex rates with respect to its foreign currency-denominated debt facilities. Nonetheless, we recognise TNB’s ongoing efforts to reduce this exposure by trimming the Group’s foreign-currency debts. TNB’s foreign-currency debts dropped from 35% as at end-August 2012 to 27% as at end-November 2013.

Media contact

Adeline Poh

(603) 7628 1021

adeline@ram.com.my