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) in view of the Group’s strategic position as the national electricity utility company.

Published on 18 May 2016

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) in view of the Group’s strategic position as the national electricity utility company. Based on our rating methodology for government-linked entities, TNB is highly likely to receive extraordinary government support in the event of financial distress, given its role that is deemed critical to the nation and the Group’s very strong relationship with the Government.

Besides having a near-monopoly over the transmission and distribution of electricity across Peninsular Malaysia and Sabah, TNB has remained a dominant player in the domestic power-generating business, controlling 53% of the peninsula’s generating capacity as at end-August 2015 – this is expected to increase to approximately 60% in 2020. The Group also plays a crucial role as the sole off-taker of generating capacity and electrical energy produced by independent power producers (IPPs) in the peninsula. The Government, in addition to holding a special share in TNB, currently owns an aggregate 71%-stake in the Group, together with various government agencies.

The implementation of the incentive-based regulation (IBR) framework, effective 1 January 2014, further provides TNB with stability of returns over 3-year regulatory periods and gives it a fuel-cost pass-through advantage every 6 months. This has been evident in the Group’s steady adjusted operating profit before depreciation, interest and tax margin and adjusted funds from operations debt coverage since the introduction of the IBR, averaging a respective 36% and 0.26 times.

Despite the Government’s decision to raise the regulated piped gas price to RM18.20/mmBtu (from RM16.70/mmBtu), the tariff rebate had been retained, albeit lower at 1.52 sen/kWh (-32.4% from 2.25 sen/kWh) for the period between January 2016 and June 2016, premised on continued fuel cost savings from declining fossil fuel prices. As such, we maintain a positive view of the IBR mechanism on account of increased transparency and a more structured framework for TNB’s tariff reviews.

TNB’s leverage is expected to increase in tandem with ongoing initiatives to raise the nation’s power-generation capacity and its international expansion plans. This could either manifest in an additional drawdown of debt to fund the construction of power plants, or adjustments for additional capacity payments to new IPPs. Factoring in a purchase consideration of USD255 million funded through borrowings for the recent acquisition of Turkey-based GAMA Enerji A.S. and a purchase consideration of USD300 million to acquire GMR Energy Limited, assuming it is fully financed via borrowings, TNB’s financial metrics are still expected to be within RAM’s expectations.

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Adeline Poh

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adeline@ram.com.my