Tenaga Nasional Bhd - 2010

MARC has upgraded Tenaga Nasional Berhad’s (TNB) issuer and Islamic debt ratings to AAA and AAAID respectively from AA+ and AA+ID. The rating action affects the following outstanding issues: i) RM1.0 billion Al-Bai’ Bithaman Ajil Notes Issuance Facility; and ii) RM2.0 billion Al-Bai’ Bithaman Ajil Bonds. The outlook is stable.

The upgrade of TNB's rating reflects MARC's revised assumption of very strong government support for TNB's obligations based on its role in the national energy policy and its economic importance as the country's principal energy supplier. TNB is responsible for Malaysia's transmission grid and accounts for 47.4% of the country's generation output. The electric utility company remains a government-controlled entity; it is publicly regulated and the government's golden share in TNB gives it veto power in major decisions of the company. MARC believes that the government has strong incentives to ensure the long-term financial sustainability of TNB and continues to exhibit the requisite commitment, notwithstanding the observed volatility in its financial performance stemming from fluctuations in fuel prices.

Regulated electricity supply tariffs have remained broadly supportive of the recovery of investments and generation costs, as implied by TNB's strong earnings and cash flow generation in recent periods.  The subsidised cost of gas to the domestic power sector continues to provide meaningful protection from volatile and upward movements in world gas prices.

The upgrade of TNB's rating also reflects an improved financial profile arising from an improvement in its earnings before interest, taxes, depreciation, and amortisation (EBITDA) and decreasing debt level for 12 months ended August 31, 2010 (FY2010). TNB's FY2010 results benefited from an 8.4% increase in electricity demand, lower fuel prices and appreciation of the ringgit against the USD and yen. Its profitability continues to remain healthy, although its EBITDA margin has narrowed in recent quarters as a result of rising coal prices.

Capacity payments to independent power producers per unit of electricity generated in the Peninsular, meanwhile, are projected to decline steadily through FY2015 after peaking in FY2011. TNB's EBITDA margin should widen in line with the projected decline in the Peninsular's reserve margin to around 20% in 2015 from 44.8% in May 2010 based on its forecast of annual demand growth of 5% from 2010 through 2015, assuming no new capacity and older plants are retired. MARC notes that actual electricity demand  growth  has  been running  ahead of  its forecasts, and will create pressure on existing installed power generation capacity. TNB plans to boost the capacity of its coal-fired power plant in Manjung, Perak by another 1,000 MW by 2015. Its two new hydro plants in Terengganu and Pahang will also provide additional generation capacity of 250MW and 372MW by 2015 and 2016 respectively.

TNB's capex needs have been registering a downward trend since FY2007 and have been covered by internally generated cash flow. Its liquidity has been enhanced by lower capex needs and strong cash flow from operations (CFO) generation. As of August 31, 2010, TNB had cash balances of RM6.5 billion at company level and RM8.3 billion at group level, compared to RM5.2 billion and RM6.2 billion respectively a year ago.

Meanwhile, TNB's total debt dropped to RM21.3 billion as at end-August 2010 from RM22.6 billion a year ago due to net repayments of RM0.7 billion and a RM0.6 billion forex translation gain. TNB’s CFO-to-total debt ratio of 0.31 times (x) for FY2010 and net gearing ratio of 0.26x as of end-August 2010 showed improvement over FY2009 levels of 0.27x and 0.34x respectively. With capex needs for FY2011 and FY2012 projected to be maintained around current levels, before peaking at an estimated RM6.5 billion in FY2013, the impact on TNB's financial metrics should be muted provided its cash generation remains solid.

At the same time, MARC is mindful of TNB's plans to invest in power assets overseas in addition to domestic expansion going forward. The rating agency believes that sizeable increases in TNB's diversification investments going forward will increase the utility's exposure to event risk, notwithstanding the strength of its domestic market position. Additionally, its commitment to retaining a prudent capital structure at the group level could also be tested by its overseas ventures.

For the three-month period ended November 30, 2010 (1QFY2011), TNB registered a higher revenue of RM7,726.4 million (1QFY2010: RM7,338.3 million) driven by electricity demand growth of 5.0% in Peninsular Malaysia and 6.4% in Sabah. At the same time, TNB’s operating expenses increased by 6.1% due to higher cost of electricity generation from the combination of increased consumption and average prices of coal. Reflecting the uptrend in coal prices, TNB’s cost per unit of electricity sold increased to 28.3 sen (1QFY2010: 28.1 sen), which led to a decrease of margin per kwh to 3.0 sen from 3.2 sen. TNB’s EBITDA margin narrowed slightly to 28.5% compared to 29.5% for the preceding year’s corresponding quarter. Notwithstanding this, TNB posted higher net profits of RM714.9 million compared to 1QFY2010’s RM697.5 million as a result of lower finance costs. Its DE ratio improved to 0.72 times (end of August 2010: 0.74 times) as a result of improved earnings retention and repayment of debt.
 
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