TENAGA NASIONAL BERHAD - 2018

MARC has affirmed its corporate credit rating on Tenaga Nasional Berhad (TNB) at AAA and its sukuk rating on TNB’s RM2.0 billion Al-Bai’ Bithaman Ajil Bonds at AAA_IS. The ratings outlook is stable. TNB’s ratings benefit from a two-notch uplift to reflect MARC's assessment of a high likelihood of government support premised on TNB’s standalone corporate credit rating of AA/Stable. The support assessment also considers the government’s indirect majority ownership in TNB which provides it with considerable leeway to influence the utility company’s strategic direction. TNB’s credit strength reflects its monopoly on electricity transmission and distribution in Peninsular Malaysia and Sabah, its significant electricity generation capacity and strong operational track record with a generation capacity amounting to 13,158MW (54.1% of total installed capacity in Peninsular Malaysia) in 2018.

TNB’s OPBITDA margin declined to 28.7% in 2018 (PE2017: 32.3%, FY2017: 32.6%) on the back of higher fuel costs and operating expenses. Against a backdrop of moderating revenue growth prospects and increasing operating expenses, the rating agency expects TNB to manage its operational costs more prudently going forward. As more consumers manage their energy usage to incorporate energy efficiency targets, MARC believes electricity growth will remain tepid over the medium term. The implementation of MFRS 16 beginning January 1, 2019 onwards may impact TNB’s profitability margins. MARC will continue to monitor the impact of MFRS 16 on TNB’s financials.

Despite posting lower net profit of RM3.7 billion, the group’s cash flow from operations (CFO) stood higher at RM14.4 billion, while its CFO interest coverage and CFO debt coverage stood lower at 7.21x and 0.22x. TNB’s free cash flow stood at negative RM1.9 billion, after the disbursement of capex amounting to RM11.8 billion. As at 2018, major generation projects comprised 30.5% of TNB’s capex while recurring capex formed the remaining 55.5%.

As at end-2018, TNB’s total borrowings increased by 13.0% to RM52.4 billion on the back of the RM3.0 billion Sukuk Wakalah issuance in August 2018 and the US$750.0 million multi-currency sukuk issuance in November 2018. TNB’s standalone rating could come under pressure if its leverage-related metrics continue to weaken in 2019. TNB’s contingent liabilities, which include liquidity support provided to its subsidiaries in the form of completion support and rolling guarantees on power plant projects, remain a potential concern.

The stable outlook reflects MARC’s expectation that government support will be sustained in the next 12 to 18 months in view of TNB’s strategic importance to the nation’s energy distribution. Any weakening in TNB’s debt protection measures and/or liquidity buffer would exert pressure on its standalone rating.

Major Rating Factors

Strengths

• High likelihood of government support;
• Largest power transmission and distribution company in Malaysia; and
• Positive impact of incentive-based regulation.

Challenges/Risks

• Increased borrowings;
• High capex requirement over the next five years; and
• Sensitivity of electricity demand to economic activity.