Tenaga Nasional Bhd - 2009

MARC has affirmed Tenaga Nasional Berhad’s (TNB) issuer rating of AA+ and the utility's Islamic debt ratings as follows:

• RM1.0 billion Al-Bai Bithaman Ajil Notes Issuance Facility at AA+ID; and
• RM2.0 billion Al-Bai’ Bithaman Ajil Bonds at AA+ID

MARC has revised its ratings outlook to stable from developing to reflect expectations of more certainty regarding electricity demand and cost recovery during calendar 2010. MARC notes a reversal in earlier month-on-month declines in electricity unit sales and believes that TNB's current credit metrics remain consistent with its ratings. However, TNB's profitability remains exposed to fuel cost volatility and rising electricity generation costs which underscores the importance of timely increases in regulatory tariffs to avoid further erosion in its operating margins and associated credit protection measures. MARC continues to consider the domestic tariff-setting regime as generally supportive of TNB's credit quality.
 
The affirmed ratings, meanwhile, reflect TNB’s status as Malaysia’s fully integrated electricity utility company with a dominant position in electricity transmission and distribution in Peninsular Malaysia, satisfactory operating profile and moderate gearing level. MARC also considers TNB’s ownership structure, in particular its 84% ownership by the Malaysian government and past demonstrations of tangible support in the form of fuel price subsidies and development grants as credit strengths.

Electricity demand has shown continued improvement since April 2009 after contracting 3.2% in the financial year ended August 31, 2009 (FY2009), led by the commercial and domestic sectors. Demand from commercial and domestic sectors improved by 3.9% and 6.4% respectively, while demand from the industrial sector, which contracted by 10.1% in FY2009, declined at a much slower rate. MARC notes that since July 2009, total monthly unit demand has exceeded FY2008 levels. MARC expects a further improvement in electricity demand based on anticipated improvement in economic activity with a 3.6% annual growth in gross domestic product (GDP) for 2010.

Ongoing issues that could affect TNB's credit risk profile and its ratings include its ability to minimize the effect of rising electricity generation costs and associated the cost recovery lag by securing timely and adequate adjustments in its  electricity tariffs. MARC observes a decline in TNB's average per unit margin for FY2009  to 1.6 sen/kwh (FY2008: 1.8 sen/kwh),  notwithstanding  higher tariff  levels in FY2009. The average selling price per unit of electricity was 32.0 sen/kwh in FY2009, up from 26.7 sen/kwh in FY2008. The total cost of purchased power from independent power producers had risen by 25.1% while fuel costs rose 23.8%, outpacing revenue growth of 16.3%. Further increases in gas and coal prices will negatively affect TNB's margins. TNB's electricity tariffs, which are due for review this month, were last adjusted on March 1, 2009. They were reduced by an average of 3.7% following a 24% hike in July 2008.

For financial year ended August 2009 (FY2009), pre-tax profit declined by 49% to RM1.5 billion due to higher fuel costs, IPP payments and foreign exchange translation losses. TNB registered a foreign exchange translation loss of RM1.2 billion as a result of the depreciation of the ringgit relative to the foreign currencies in which TNB's non-domestic borrowings are denominated. Partly mitigating the forex translation loss is the low finance cost of its yen loans.

TNB's cash flow protection remains relatively strong. It generated operating cash flow (CFO) of RM7,409.3 million for FY2009 (FY2008: RM7,341.5 million) and its debt service cover ratio (DSCR) improved to 4.21x, attributable to lower finance charges and debt repayment. TNB's debt leverage, as measured by the ratio of its debt to equity (D/E), declined marginally to 0.87x (FY2008: 0.88x) following continued repayment/repurchase of existing debt as well as higher shareholders’ funds. The utility is expected to continue to reduce its debt through its free cash flow.

For the three-month period ended November 30, 2009, TNB registered a lower revenue of RM7,338.3 million (1QFY2009: RM7,414.6 million) due to 3.5% lower average electricity tariffs compared to 2.7% higher electricity demand. Net profit improved to RM697.5 million (1QFY2009: Net loss of RM940.7 million) attributed to lower coal prices and foreign exchange translation loss. As a result of lower fuel costs, TNB’s cost per unit of electricity sold decreased to 27.8 sen the first half FY2009 from 30.4 sen a year before; while margin per kwh increased to 3.2 sen from 1.8 sen. The D/E ratio decreased to 0.85x (end-August 2009: 0.87x) as a result of repayment of debt and improved shareholders’ funds.

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