Friday, Oct 04, 2002
Ratings for Tenaga Nasional Berhad reflect the utility’s strategic importance to Malaysia’s economy and national security given its role as principal supplier of electricity in the country and an acceptable level of financial risk for the rating category. The outcome of current gas price discussions with Petronas Gas Berhad will however have a significant impact on the utility’s financials should supplementary tariff relief be absent.
Since the last rating review, the Malaysian government has decided to operate a managed market model in its restructuring of the electricity supply industry (ESI) as opposed to the power pooling system it had previously planned to introduce. More importantly, TNB will continue to retain a major role in generation. The utility will continue to build new generating capacity itself as well as take shareholdings in new IPP projects. The ESI will undergo a gradual transition to a competitive market, of which the implementation of an open bidding system for power plant construction projects after 2005 will be one of the initial key elements.
A gas supply shortage scenario has also developed in the power sector of late. The inadequate supply of gas to the gas-fired plants which currently generate about 80% of eletricity in the country has caused these plants to turn to more expensive alternative fuels. Automatic adjustment mechanisms relating to changes in fuel costs contained in the power purchase agreements with the independent power producers (IPPs) suggest that TNB is exposed to the higher fuel costs. Recently concluded fuel cost-sharing arrangements involving Petronas Gas Berhad (as gas supplier), the independent power producers (IPPs) and TNB will see the parties sharing additional fuel costs where alternative fuels are being used as a result of unscheduled maintenance work by Petronas Gas. More important relief from upward pressure on fuel costs has come from an improvement in gas supply shortfall situation.
In the nine months to May 31, 2002, TNB posted a RM652.8 million or 6.1% increase in its revenue compared to the corresponding period for the preceding year but pre-tax profit fell to RM1.3 billion from RM1.9 billion. Higher electricity production costs in 3Q02 coupled with a foreign exchange translation loss of RM539.1 million saw TNB reporting a loss of RM325.9 million for the third quarter. TNB’s reported earnings in FY2002 and beyond remains exposed to the direction of the Japanese Yen, changes in fuel costs (which forms a significant portion of electricity production costs) and the rate of the economic growth. In addition, new accounting rules on income taxes, MASB 25, indicate that additional provisions for deferred tax may be required in FY2003. Nonetheless, MARC expects operating cash flow debt service cover to remain adequate, particularly as most of the foreign exchange losses do not translate into cash outflows. Other mitigating factors include the utility’s low levels of near-term debt maturities and continued strong access to funds, especially the domestic bond market.
Since the last rating review, the Malaysian government has decided to operate a managed market model in its restructuring of the electricity supply industry (ESI) as opposed to the power pooling system it had previously planned to introduce. More importantly, TNB will continue to retain a major role in generation. The utility will continue to build new generating capacity itself as well as take shareholdings in new IPP projects. The ESI will undergo a gradual transition to a competitive market, of which the implementation of an open bidding system for power plant construction projects after 2005 will be one of the initial key elements.
A gas supply shortage scenario has also developed in the power sector of late. The inadequate supply of gas to the gas-fired plants which currently generate about 80% of eletricity in the country has caused these plants to turn to more expensive alternative fuels. Automatic adjustment mechanisms relating to changes in fuel costs contained in the power purchase agreements with the independent power producers (IPPs) suggest that TNB is exposed to the higher fuel costs. Recently concluded fuel cost-sharing arrangements involving Petronas Gas Berhad (as gas supplier), the independent power producers (IPPs) and TNB will see the parties sharing additional fuel costs where alternative fuels are being used as a result of unscheduled maintenance work by Petronas Gas. More important relief from upward pressure on fuel costs has come from an improvement in gas supply shortfall situation.
In the nine months to May 31, 2002, TNB posted a RM652.8 million or 6.1% increase in its revenue compared to the corresponding period for the preceding year but pre-tax profit fell to RM1.3 billion from RM1.9 billion. Higher electricity production costs in 3Q02 coupled with a foreign exchange translation loss of RM539.1 million saw TNB reporting a loss of RM325.9 million for the third quarter. TNB’s reported earnings in FY2002 and beyond remains exposed to the direction of the Japanese Yen, changes in fuel costs (which forms a significant portion of electricity production costs) and the rate of the economic growth. In addition, new accounting rules on income taxes, MASB 25, indicate that additional provisions for deferred tax may be required in FY2003. Nonetheless, MARC expects operating cash flow debt service cover to remain adequate, particularly as most of the foreign exchange losses do not translate into cash outflows. Other mitigating factors include the utility’s low levels of near-term debt maturities and continued strong access to funds, especially the domestic bond market.