Wednesday, Nov 21, 2001
Malaysian Rating Corporation Berhad (MARC) has affirmed Tenaga Nasional Berhad’s issuer ratings at AA+/MARC-1. MARC has also affirmed TNB’s Al-Bai Bithaman Ajil Notes Issuance Facility rating at AA+ID and Eight-year Fixed Rate Unsecured Bonds rating at AA+. The ratings affirmation is based on TNB’s strategic importance to Malaysia’s economy and national security given its role as principal supplier of electricity in the country. TNB’s near term financial risk profile will be characterised by high financial leverage, adequate interest coverage ratios, large capital expenditure requirement and exposure to foreign exchange risk from its foreign currency–denominated debt obligations. This is however tempered by TNB’s monopoly market position in transmission and distribution, potential substantial divestment proceeds, strong reserves and substantial government ownership. Management intends to reduce exposure to foreign exchange risks by altering the funding mix to 60:40 in the medium term and 80:20 in the longer term respectively, being the ratio of Ringgit to foreign currency denominated borrowings. The outcome of upcoming gas price discussions and tariff reviews, as well as a generally supportive economic environment are important to TNB’s financial strength and its long-term rating.
TNB accounted for 63% of the electricity generation capacity in Peninsular Malaysia as of August 31, 2000. With planned capital expenditures for generation projects in the region of RM12.3 billion from FY2001 to FY2003, the utility will likely retain an important role in electricity generation. Apart from being a dominant producer of electricity, TNB possesses a near-monopoly position in the transmission and distribution of electricity. TNB is owner of the ‘National Grid’, a transmission system which spans Peninsular Malaysia, from north to south, and through which electricity is delivered to customers. The utility is also the largest distributor of electricity to customers in the Peninsular Malaysia and Sabah.
Since 1996, generation capacity in Peninsular Malaysia has more than caught up with demand as a result of TNB’s own capacity expansion and the introduction of independent power producers (IPPs). Until FY2000, reserve margins were far in excess of the industry desired ratio of 30%, the cost of which, has been primarily borne by TNB. Reserve margin as at July 2001 was 31.7%. Four additional IPPs have been licensed by the Malaysian Government to provide 1,970 MW of additional generation capacity by end 2003. Of rating concern, is the potential recurrence of an electricity oversupply situation and its effect on TNB’s capacity utilization and reserve margin. The Malaysian Government is also looking to further restructure the electricity supply industry although no definitive time frame has been announced. Despite the uncertainties associated with the power sector reform processes, MARC believes that the regulatory environment will remain largely supportive. The government appears anxious to avoid issues demonstrated by the recent California power crisis and is expected to be judicious in its approach to opening the electricity market to competition.
MARC views the company’s unrelenting commitment to improve operational efficiency and to cut operating costs favourably. Notable progress made during FY2000 in the area of generation included the achievement of availability targets, reductions in operation and maintenance costs and improved thermal efficiency. Cost savings were recorded in both the transmission and distribution sectors. TNB has introduced measures to improve the quality of electricity supply, some of which were aimed at minimizing interruptions. The number of power interruptions in FY2000 consequently decreased by 26.1% from FY1999.
Reflecting improved economic conditions, TNB’s revenue from electricity sales grew 12.8% in FY2000, primarily on account of a 14.0% increase in kilowatt-hours of electricity sold. Average tariff rates during FY2000 remained unchanged at 23.5 sen per kWh, which was substantially the same average rate charged since the last rate increase of May 1997. Stronger revenue growth relative to operating expenses, smaller exchange translation losses and lower interest costs resulted in a 55.9% jump in pre-tax profits to RM1.5 billion. An extension of the earnings uptrend was evident in the company’s unaudited results for the nine months ended May 31, 2001, which saw TNB post a pre-tax profit of RM1.92 billion. TNB’s debt to equity ratio remained high at 1.92x as at end FY2000. The company has significant capital expenditure requirements, aggregating RM23.7 billion over the next three years. The company’s favourable access to domestic and overseas capital markets as well as management’s continuing efforts in improving liability management mitigate concerns regarding TNB’s sizable debt obligations (i.e. RM14.3 billion) due over the next five years.
TNB accounted for 63% of the electricity generation capacity in Peninsular Malaysia as of August 31, 2000. With planned capital expenditures for generation projects in the region of RM12.3 billion from FY2001 to FY2003, the utility will likely retain an important role in electricity generation. Apart from being a dominant producer of electricity, TNB possesses a near-monopoly position in the transmission and distribution of electricity. TNB is owner of the ‘National Grid’, a transmission system which spans Peninsular Malaysia, from north to south, and through which electricity is delivered to customers. The utility is also the largest distributor of electricity to customers in the Peninsular Malaysia and Sabah.
Since 1996, generation capacity in Peninsular Malaysia has more than caught up with demand as a result of TNB’s own capacity expansion and the introduction of independent power producers (IPPs). Until FY2000, reserve margins were far in excess of the industry desired ratio of 30%, the cost of which, has been primarily borne by TNB. Reserve margin as at July 2001 was 31.7%. Four additional IPPs have been licensed by the Malaysian Government to provide 1,970 MW of additional generation capacity by end 2003. Of rating concern, is the potential recurrence of an electricity oversupply situation and its effect on TNB’s capacity utilization and reserve margin. The Malaysian Government is also looking to further restructure the electricity supply industry although no definitive time frame has been announced. Despite the uncertainties associated with the power sector reform processes, MARC believes that the regulatory environment will remain largely supportive. The government appears anxious to avoid issues demonstrated by the recent California power crisis and is expected to be judicious in its approach to opening the electricity market to competition.
MARC views the company’s unrelenting commitment to improve operational efficiency and to cut operating costs favourably. Notable progress made during FY2000 in the area of generation included the achievement of availability targets, reductions in operation and maintenance costs and improved thermal efficiency. Cost savings were recorded in both the transmission and distribution sectors. TNB has introduced measures to improve the quality of electricity supply, some of which were aimed at minimizing interruptions. The number of power interruptions in FY2000 consequently decreased by 26.1% from FY1999.
Reflecting improved economic conditions, TNB’s revenue from electricity sales grew 12.8% in FY2000, primarily on account of a 14.0% increase in kilowatt-hours of electricity sold. Average tariff rates during FY2000 remained unchanged at 23.5 sen per kWh, which was substantially the same average rate charged since the last rate increase of May 1997. Stronger revenue growth relative to operating expenses, smaller exchange translation losses and lower interest costs resulted in a 55.9% jump in pre-tax profits to RM1.5 billion. An extension of the earnings uptrend was evident in the company’s unaudited results for the nine months ended May 31, 2001, which saw TNB post a pre-tax profit of RM1.92 billion. TNB’s debt to equity ratio remained high at 1.92x as at end FY2000. The company has significant capital expenditure requirements, aggregating RM23.7 billion over the next three years. The company’s favourable access to domestic and overseas capital markets as well as management’s continuing efforts in improving liability management mitigate concerns regarding TNB’s sizable debt obligations (i.e. RM14.3 billion) due over the next five years.