Tenaga Nasional Bhd - 2008 / 2009

MARC has affirmed Tenaga Nasional Berhad’s (TNB) issuer rating of AA+ as well as its ratings on TNB’s Islamic debt facilities which are as follows:

    • RM1.0 billion Al-Bai Bithaman Ajil Notes Issuance Facility rated AA+ID;
    • RM2.0 billion Al-Bai’ Bithaman Ajil Bonds rated AA+ID; and
    • RM1.5 billion Murabahah Commercial Papers and Murabahah Medium Term Notes rated MARC-1ID/AA+ID.

Its rating outlook has been revised to developing from stable to reflect the possibility of an extended period of earning and cash flow weaknesses stemming from rising capacity payment obligations to independent power producers (IPPs) in respect of new generation capacity coming onstream at a time of slowing domestic electricity demand. Electricity demand growth in peninsular Malaysia contracted 3.2% during the six month period ended February 2009. The foregoing has caused reserve margin to breach the 50% level. The pressure on TNB’s profit margins, credit metrics and cash flow is accentuated by its rising debt service payments on its sizeable foreign loan obligations on account of weakening Ringgit.

The affirmed ratings reflect TNB’s status as Malaysia’s fully integrated electricity utility company with monopolistic positions in electricity transmission and distribution, satisfactory operating efficiency and moderate gearing level. TNB’s ownership structure, in particular 82% ownership by the Malaysian government, continues to be a key credit strength of the utility company, as tangible support extended in the form of fuel price subsidy and development grants.

The recent reduction in electricity tariffs of between 2.5% and 5.2% effective March 1, 2009 is expected to reduce TNB’s annual revenue by about RM1.2 billion. A corresponding 25.2% reduction in the cost of the subsidized gas price granted under the new tariff structure will, in addition to offsetting the reduced revenue, provide for full recovery of coal costs if coal price is maintained at or below USD85.00 per metric tonne. For the six months ended February 2009 (1HFY2009), however, actual average coal cost was significantly higher at USD100.90 per metric tonne. Thermal coal prices are, however, forecasted to decline through the remaining months of 2009, to levels supportive of full cost recovery. Fuel cost accounts for 30% of TNB’s operating cost. 

TNB’s high reserve margin is set to rise further from June 2009 onwards when the second unit of Jimah’s coal-fired power plant comes onstream and if electricity demand remains subdued. TNB has already placed two of its electricity plants on standby for possible shutdown. The fixed capacity payments to IPPs, which presently constitute 20% of operating cost, will weigh heavily on TNB’s financial results given the high reserve margin levels currently and over the next several years. In the case of Jimah, TNB has to make a capacity payment of about RM200 million in FY2009, rising to about RM800 million in FY2010 and RM1.0 billion in FY2011 upon full operation.

For 1HFY2009, the depreciation of Ringgit against major currencies caused TNB’s total debt, of which 26.1% and 23.2% are denominated in USD and Yen respectively, to rise by 3.0% to RM23.4 billion after taking into account 2.6% reduction in debt in relation to a bond buyback. As a result, the group registered foreign currency translation loss of RM1.5 billion. For the six month period, the group posted a net loss of RM286.2 million compared to a profit of RM2,586.1 million in the prior year corresponding period. TNB’s cash flow generation was similarly affected, as reflected in its negative free cash flow of RM191.8 million at company level in 1HFY2009. MARC expects continued near-term weaknesses in TNB’s credit metrics. If its financial profile does not begin to improve in the intermediate term, MARC will review its ratings and rating outlook on TNB’s debt. 

Major Rating Factors

Strengths

Challenges/Risks