Tenaga Nasional Bhd - 2007

MARC has reaffirmed Tenaga Nasional Berhad’s (TNB) issuer rating of AA+. MARC has also reaffirmed its ratings on TNB’s Islamic debt facilities as follows:

·               RM2.0 billion Al-Bai’ Bithaman Ajil Bonds rated AA+ID;

·               RM1.5 billion Murabahah Commercial Papers and Murabahah Medium Term Notes rated MARC-1ID/AA+ID; and

·               RM1.0 billion Al-Bai Bithaman Ajil Notes Issuance Facility rated AA+ID.

The ratings reflect TNB’s major role in electricity generation and its monopolistic position in electricity transmission and distribution, steady growth of electricity demand, sound financial performance in FY2007, improved operating efficiency and its experienced management team. These positives were moderated by challenges faced by TNB which include rising coal prices, increasing capacity payment obligations with new IPPs coming onstream, and heavy ongoing capital spending requirements that will put pressure on earnings and free cash flow generation, going forward. The ratings carry a developing outlook.

TNB is a fully integrated electricity utility in Malaysia with majority government ownership of 68.1% as at August 31, 2007 (75.9% in FY2006). It has 11,200 MW installed generation capacity as at 31 August, 2007, and 56.96% of the total industry capacity in Peninsular Malaysia. MARC believes that the political and regulatory environment will remain supportive of TNB and that assistance in the form of fuel price subsidy and development grants will continue.

In FY2007, the Group’s operational efficiency has improved significantly having exceeded most of its targeted Headline Key Performance Indicators (KPIs). TNB’s financial performance has improved following the implementation of tariff hikes in mid-2006 and higher electricity demand. TNB achieved 14.4% increase in revenue in FY2007 and 72.9% in pre-tax profit. However, profitability of TNB would likely be pressured with the new IPPs coming onstream which will impact TNB’s reserve margin and lead to higher capacity payments coupled with its exposure to rising coal prices given that 20% of the coal purchase are presently unhedged as at January 2008 and 100% beyond 2008.

TNB’s total indebtedness as at FY2007 eased to RM24 billion from RM27 billion in FY2006. This was attributed to TNB’s objective of reducing its debt as and when it matures as well as the strengthening of the ringgit against the US dollar. TNB’s interest and debt servicing measures improved in FY2007, as reflected in its increased debt service coverage ratio (DSCR) from 1.89 times to 2.81 times in FY2007. The debt to equity ratio improved from 1.4 times to 1.0 time in FY2007 on the back of lower total borrowings coupled with enlarged shareholders’ equity base.

The developing outlook on the ratings reflect uncertainty as to the timing and magnitude of a potential revision on gas prices given the increased likelihood of a near-term gas price revision, and the credit implications of an upward revision in prices on TNB’s financial profile.

Major Rating Factors

Strengths

• Near-monopoly position in transmission and distribution business;
• Majority government ownership and support through fuel price subsidy and development grants;
• Steady growth in electricity demand;
• Improvement in operating efficiency; and
• Resilient financial performance and cash flow coverage.

Challenges/Risks

• High ongoing capital expenditure;
• Generation overcapacity until 2010;
• Exposure to rising fuel costs; and
• Higher capacity payments with new independent power producers (IPPs) such as Jimah Energy (2009) and Tanjung Bin (post 2013-2014) coming onstream, going forward.