TENAGA NASIONAL BERHAD - 2015

MARC has affirmed Tenaga Nasional Berhad’s (TNB) issuer rating of AAA and Islamic debt rating of AAA_ID 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.

Major Rating Factors

Strengths

• High likelihood of government support;
• Largest power transmission and distribution company in Malaysia;
• Positive impact of incentive-based regulation (IBR); and
• Strong operational profile and track record.

Challenges/Risks

• High capital expenditure requirement over the next three years;
• Sensitivity of electricity demand to economic activity; and
• Increasing borrowings.