MARC has reaffirmed Tenaga Nasional Berhad’s (TNB) issuer and corporate debt ratings. Concurrently, the ratings have been placed on a Developing Outlook. The reaffirmation of the ratings reflects TNB’s strategic and important role to Malaysia’s economy and national security whilst retaining its dominant role in generation. Meanwhile, TNB’s monopolistic position in the transmission and distribution of electricity in Peninsular Malaysia coupled with the majority government ownership and relatively stable financial performance are also reflected in these ratings. The developing outlook is pending the review of the tariffs and the review of gas price. The vulnerability to the fuel price trend, particularly coal price as demonstrated in the last fiscal year, restricted TNB’s ability to pass through this cost increase to end consumers, and the anticipation of further borrowings to finance its capital expenditure programmes, are key moderating factors to TNB’s ratings.

TNB accounts for about 61.5% of the country’s installed capacity and distributes substantially all of the electricity demand. Electricity sales in FY2005 continued on an upward trend, rising 6.4% to RM18.3 billion spurred by the growth in electricity demand. Going forward, electricity demand is projected to grow in tandem with the country’s economic growth underscored by continued industrialization programme and rising affluence of the masses. Driving electricity sales will be the commercial and industrial sectors, which collectively accounted for 77.5% of the utility’s total sales in FY2005.
Whilst total revenue increased by 7.1% in the last fiscal year, the larger escalation of 10.1% in total operating cost resulted in the slight deterioration of the utility Group’s operating profit margin, albeit still maintaining its double-digit level. Despite a shift in fuel-mix towards reducing coal usage and maximizing its gas and hydro usage arising from its multi-fuel plants, the rising coal prices has pushed up the total fuel cost by 29.1%, as compared to previous year. Nonetheless, foreign exchange gain and continued cost management measures boosted TNB’s pre-tax profit by 22.7% to RM1,818.9 million in FY2005.

Reserve margin remains just above 40% and it is expected to decline in the medium term as there is no major planting-up programme except for the expected commissioning of Tanjung Bin Power Plant in FY2007, Tuanku Jaafar Power Station PD2 in FY2008, and Jimah Energy Ventures in FY2009. The slight improvement in TNB’s debt leverage to 1.85 times, the rebalancing of its debt maturity profile with more than 60% being repayable after five years, the vastly strategic nature of its business, coupled with strong Government support, provide TNB superior financial flexibility in terms of easy access to the capital markets.

Without a positive outcome from the crucial new favourable tariff structure, in the wake of rising operating costs and requirement to enhance the electricity supply reliability, TNB would have to resort to the capital markets to finance its capital expenditure requirement expected to be around RM4 to RM5 billion in the next fiscal year.