MARC has affirmed Tenaga Nasional Berhad’s (TNB)
issuer rating of AAA and Islamic debt rating of AAAID
on its outstanding RM2.0 billion Al-Bai’ Bithaman Ajil Bonds. The rating
outlook is stable. The ratings continue to benefit from a two-notch
uplift from TNB’s standalone corporate credit rating of AA/Stable to reflect
the high likelihood of government support for the company given its critical role
as the country’s principal energy provider. The rating support uplift also
takes into account the government’s indirect majority ownership and golden
share in TNB which provides considerable leeway to influence the utility
company’s business and financial profiles.
TNB’s credit strength is derived from its monopoly of
electricity transmission and distribution in Peninsular Malaysia and Sabah as
well as a significant electricity generation capacity. This strength is
compounded by a strong operating track record and a satisfactory debt service
coverage notwithstanding the fact that borrowings have remained high, due
largely to funding an ongoing increase in generation capacity. With the
completion and commissioning of the 1,000 MW coal-fired power plant (Manjung 4)
in April 2015 and the 1,071 MW gas-fired project (Prai) in February 2016, TNB
has two other ongoing power generation projects namely, the 1,000 MW coal-fired
project (Manjung 5) with a scheduled commercial operation date (COD) in October
2017 and the 2,000 MW coal-fired Jimah East Power (JEP) project with a
scheduled COD in June 2019 for Unit 1 and December 2019 for Unit 2. In
addition, TNB’s two hydro projects in Ulu Jelai (372MW) and Hulu Terengganu
(265MW) are expected to deliver a combined capacity of 637MW by 2016. These
projects will increase TNB’s generation capacity by 40.2% to 16,416MW from
11,708MW in Peninsular Malaysia.
MARC notes that the group’s consolidated borrowings
stood at RM31.4 billion as at August 31, 2015 (FY2015), declining marginally by
2.6% y-o-y on the back of a higher repayment on its US dollar-denominated
borrowings of RM1.1 billion (US$350 million). However, borrowings could
increase to meet the funding requirements for the JEP project and the proposed
30% acquisition of Gama Enerji A.S. in Turkey for US$255.0 million; pro-forma
leverage and net leverage position could rise to 0.74 times (x) and 0.57x
respectively in FY2016 from 0.66x and 0.47x respectively in FY2015. While the
majority of its borrowings is denominated in ringgit (78.1%), its yen (14.7%)
and US dollar (7.2%) borrowings would continue to expose the group to foreign
exchange risk.
For FY2015, TNB registered foreign exchange losses of
RM932.2 million (FY2014: RM448.9 million gain) which dragged group earnings.
Excluding the foreign exchange losses, TNB’s profit before tax would have
improved by 21.0% y-o-y to about RM8.1 billion in FY2015 on the back of a 1.2%
y-o-y increase in revenue to RM43.3 billion. TNB’s consolidated operating
profit margin improved to 19.9% (FY2014: 16.8%), mainly due to a decline in
fuel costs by 9.6% y-o-y to RM16.3 billion in FY2015 ; coal and liquefied
natural gas (LNG) prices fell 3.5% y-o-y to RM236.0 per metric tonne (MT) and
2.7% y-o-y to RM45.21 per one million British Thermal Units (mmBTU)
respectively. MARC notes that cheaper coal prices have resulted in the gradual
shift of the targeted generation mix to coal-intensive from gas-intensive. By
2017, coal-installed capacity will increase to 9,066MW when another 2,000MW
coal-generated capacity is added to the electricity grid.
In spite of the decline in fuel costs, electricity
tariffs have remain unchanged since the hike of 14.9% to 38.53 sen per
kilowatt-hour (kWh) in January 2014. Since the implementation of the Imbalance
Cost Pass-Through (ICPT) mechanism under the Incentive Based Regulation (IBR)
system, TNB registered an over-recovery amounting to about RM1.9 billion as at
end-August 2015. The government reduced the tariff rebate granted to consumers
by 0.73 sen/kwh to 1.52 sen/kWH for electricity usage from January 2016 to June
2016 following the increase in regulated gas price to RM18.20/mmBTU in January
2016. Should electricity tariffs remain unchanged amid an increase in fuel
costs beyond the over-recovery, TNB would be able to pass-through the
additional generation cost to consumers via the ICPT mechanism under the IBR
system. MARC views the implementation of the IBR system favourably as it more
transparent, thereby allowing better earnings predictability.
TNB’s cash generation ability remains fairly strong
with its net cash flow from operations of RM11.4 billion in FY2015, leading to
a lower free cash flow deficit of RM995.8 million (FY2014: negative RM1.6
billion) although the group’s capital expenditure (capex) requirement and
dividend payments were higher at RM10.7 billion and RM1.6 billion respectively
(FY2014: RM10.0 billion; RM1.4 billion). However, TNB’s cash and bank balances
declined to RM2.5 billion largely due to acquisition costs of RM768.7 million
for equity stakes in Integrax Berhad (Integrax) and JEP; higher net repayment
on borrowings during the year; and investments of approximately RM2.8 billion
in unit trusts funds which increased the group’s short-term financial assets to
RM6.4 billion in FY2015 (FY2014: RM3.6 billion). TNB is currently seeking to
resolve a dispute with the Inland Revenue Board over additional assessment
charges of RM985.6 million and RM1,082.6 million for 2013 and 2014
respectively; should it fail, TNB could be liable for a possible payment of
RM2.07 billion. In addition, over the next few years, MARC opines TNB’s
liquidity cushion would come under pressure in light of its high capex, large
dividend payments and working capital pressures.
The stable outlook reflects MARC’s expectations that
the government support assumption will be sustained in the next 12 to 18 months
in view of TNB’s strategic importance to the nation’s energy security. Any
weakening in TNB’s debt protection measures and/or liquidity buffer would exert
pressure on its standalone rating.
Contacts: Nicola Tan, +603-2082 2262/ nicola@marc.com,my; David Lee, +603-2082 2255/ david@marc.com.my.
April 5, 2016
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