Thursday, Mar 02, 2000
Malaysian Rating Corporation Berhad (MARC) has upgraded the long-term issuer rating of Tenaga Nasional Berhad (TNB) to AA+ (double A plus) and reaffirmed TNB`s short-term issuer rating at MARC-1. Arising from the upgrade of TNB`s long-term issuer rating, TNB`s Al-Bai Bithaman Ajil Notes Issuance Facility [Tranche 1 (1997/2007) and Tranche 2 (1997/2012)] and Fixed Rate Unsecured Bonds (1998/2006) have been upgraded to AA+ (double A plus).
TNB`s dominant role in generation, near-monopolistic position in the transmission and distribution of electricity, majority government ownership and expected improvement in its financial performance arising from energy demand growth and promised tariff review underpin the Utility`s strong rating. TNB expects to retain its dominant position in transmission and distribution activities and diminish its generation role arising from the industry restructuring which would eventually see the establishment of a power pooling market. Once the power pooling market is fully operational, TNB would cease to be the off-taker except for contractual obligations to the existing Independent Power Producers (IPPs). Capital spending would then be confined to transmission and distribution assets. The more immediate impact as TNB gears up for the restructuring process would be the inflow of asset divestment proceeds, which will reduce TNB`s debt levels, leading to a stronger balance sheet.
These positive factors are moderated by the present irregular tariff-setting exercise; still substantial capital investment programme in the immediate term; increasing operating expenses and significant exposure to foreign exchange risks. Additionally, with the restructuring, new skills will be required to cope with a more dynamic and competitive environment.
TNB currently accounts for two-thirds of the country`s installed capacity and distributes substantially all of the electricity used. The Utility is, thus, strategically important to Malaysia`s economy and national security. The government has considerable influence in the Utility`s operations by virtue of its majority ownership of the latter`s share capital.
Positioning itself for the restructuring of the electricity sector, TNB has set up subsidiaries to assume its generation, transmission and distribution functions. Part of TNB`s interests in its generation subsidiaries will be divested, raising funds for the parent company. To date, the Utility has sold its 330MW power plant in Malacca and will be selling 40% of its interest in the Kapar power station.
Unit sales of electricity in FY98 and FY99 grew by 8% and 0.74% respectively, compared to 15% in FY97, reflecting the adverse impact of the 1998 economic recession on electricity demand growth. In the near-to-medium term, electricity demand is expected to recover to pre-recession levels of around 8% annually. Unit electricity sales figure for the first five months of FY2000 increased 16% compared to the corresponding period in FY99. Driving electricity sales will be the industrial and commercial sectors that had contributed on average 55% and 27% respectively of the Utility`s total sales in kWh in the past. The relatively high exposure to both these sectors has made electricity demand more sensitive to changes in the economic environment.
Tariff adjustments, which are subject to regulatory approval, have not been regular, with the last interim tariff increase of 8.3% effected in mid 1997.
TNB expects the next tariff review to be undertaken in the current year. Until the tariff review takes place, TNB`s financial position remains susceptible to fluctuations in fuel prices and the increasing cost of purchased power from IPPs due to the lack of an avenue to pass through increases in operating costs to consumers. Accounting for 35% of operating expenses (including depreciation and interest charges) in FY99 (FY98 : 34%), power purchases are expected to hover around RM4.0 billion per annum (inclusive of energy payments) up to FY2002. With more than 12,000 MW of installed capacity, the reserve margin over peak demand of 8,980 MW was 33.6%; the cost of which has to be borne by TNB.
The anticipated pick up in demand will moderate the excess capacity, going forward.
TNB`s generation mix in FY99 comprises hydro (18.6%), coal (11.3%), combined cycle and gas (57.3%), oil (12.8%). While gas price is fixed until the year 2000, the prices of the other types of fuel are denominated in US Dollars.
TNB`s exposure to foreign exchange risk in its fuel procurement has been mitigated by the pegging of the US Dollar/Ringgit exchange rate in September last year. Greater emphasis is also being placed on gas and coal consumption in the future. The gas price arrangement will be reviewed in year 2000, but given the government`s support for the Utility, any price revision is not expected to adversely affect TNB`s financial position.
Fiscal 1999 saw TNB record an improved financial performance with a profit before tax of RM978 million compared to the huge loss of RM2.8 billion suffered previously, due mainly to higher electricity sales and lower foreign exchange translation losses. Operating margin rose to 21.1% (FY98 : 16.5%), aided by the marginal drop in operating expenses. Interest expense declined by about 15% to RM1.06 billion attributable to the pegging of the Ringgit, lower interest rates on the Yen loans and management`s efforts to source for local funding during the year. Exposure to foreign currency, however, is quite significant, with 59% of its total long-term debt obligations denominated in foreign currency, that is, the US Dollar and Yen. As a result of the appreciation of the Yen against the Ringgit, the Utility suffered a translation loss of over RM600 million in respect of its Yen obligations in FY99 (FY98 : RM3,506 million). Interest coverage by funds from operations is expected to average a comfortable 3.6x in the medium term. Debt service coverage will be lower, at close to 1.5x over the next three years, as more than RM7.2 billion of debts are due to be repaid within that period. Nevertheless, the inclusion of divestment proceeds of the Kapar plant estimated in excess of RM5.0 billion would improve TNB`s debt service cover over the next few years. TNB`s large capital expenditure requirement, estimated at more than RM5 billion per annum (inclusive of about RM1.5 billion for generation capex), will keep the Utility`s debt leverage at above 60% over the next three to four years. Funding for the capex will be through a combination of conventional borrowings, the capital market as well as the disposal of part of its interest in generation assets.
Going forward, TNB is expected to further improve on its financial performance with the pick up in electricity demand in the wake of the economic recovery. Regulatory support in the forms of tariff increase and/or caps on fuel costs would be essential for the Utility to strengthen its financial position.
TNB`s dominant role in generation, near-monopolistic position in the transmission and distribution of electricity, majority government ownership and expected improvement in its financial performance arising from energy demand growth and promised tariff review underpin the Utility`s strong rating. TNB expects to retain its dominant position in transmission and distribution activities and diminish its generation role arising from the industry restructuring which would eventually see the establishment of a power pooling market. Once the power pooling market is fully operational, TNB would cease to be the off-taker except for contractual obligations to the existing Independent Power Producers (IPPs). Capital spending would then be confined to transmission and distribution assets. The more immediate impact as TNB gears up for the restructuring process would be the inflow of asset divestment proceeds, which will reduce TNB`s debt levels, leading to a stronger balance sheet.
These positive factors are moderated by the present irregular tariff-setting exercise; still substantial capital investment programme in the immediate term; increasing operating expenses and significant exposure to foreign exchange risks. Additionally, with the restructuring, new skills will be required to cope with a more dynamic and competitive environment.
TNB currently accounts for two-thirds of the country`s installed capacity and distributes substantially all of the electricity used. The Utility is, thus, strategically important to Malaysia`s economy and national security. The government has considerable influence in the Utility`s operations by virtue of its majority ownership of the latter`s share capital.
Positioning itself for the restructuring of the electricity sector, TNB has set up subsidiaries to assume its generation, transmission and distribution functions. Part of TNB`s interests in its generation subsidiaries will be divested, raising funds for the parent company. To date, the Utility has sold its 330MW power plant in Malacca and will be selling 40% of its interest in the Kapar power station.
Unit sales of electricity in FY98 and FY99 grew by 8% and 0.74% respectively, compared to 15% in FY97, reflecting the adverse impact of the 1998 economic recession on electricity demand growth. In the near-to-medium term, electricity demand is expected to recover to pre-recession levels of around 8% annually. Unit electricity sales figure for the first five months of FY2000 increased 16% compared to the corresponding period in FY99. Driving electricity sales will be the industrial and commercial sectors that had contributed on average 55% and 27% respectively of the Utility`s total sales in kWh in the past. The relatively high exposure to both these sectors has made electricity demand more sensitive to changes in the economic environment.
Tariff adjustments, which are subject to regulatory approval, have not been regular, with the last interim tariff increase of 8.3% effected in mid 1997.
TNB expects the next tariff review to be undertaken in the current year. Until the tariff review takes place, TNB`s financial position remains susceptible to fluctuations in fuel prices and the increasing cost of purchased power from IPPs due to the lack of an avenue to pass through increases in operating costs to consumers. Accounting for 35% of operating expenses (including depreciation and interest charges) in FY99 (FY98 : 34%), power purchases are expected to hover around RM4.0 billion per annum (inclusive of energy payments) up to FY2002. With more than 12,000 MW of installed capacity, the reserve margin over peak demand of 8,980 MW was 33.6%; the cost of which has to be borne by TNB.
The anticipated pick up in demand will moderate the excess capacity, going forward.
TNB`s generation mix in FY99 comprises hydro (18.6%), coal (11.3%), combined cycle and gas (57.3%), oil (12.8%). While gas price is fixed until the year 2000, the prices of the other types of fuel are denominated in US Dollars.
TNB`s exposure to foreign exchange risk in its fuel procurement has been mitigated by the pegging of the US Dollar/Ringgit exchange rate in September last year. Greater emphasis is also being placed on gas and coal consumption in the future. The gas price arrangement will be reviewed in year 2000, but given the government`s support for the Utility, any price revision is not expected to adversely affect TNB`s financial position.
Fiscal 1999 saw TNB record an improved financial performance with a profit before tax of RM978 million compared to the huge loss of RM2.8 billion suffered previously, due mainly to higher electricity sales and lower foreign exchange translation losses. Operating margin rose to 21.1% (FY98 : 16.5%), aided by the marginal drop in operating expenses. Interest expense declined by about 15% to RM1.06 billion attributable to the pegging of the Ringgit, lower interest rates on the Yen loans and management`s efforts to source for local funding during the year. Exposure to foreign currency, however, is quite significant, with 59% of its total long-term debt obligations denominated in foreign currency, that is, the US Dollar and Yen. As a result of the appreciation of the Yen against the Ringgit, the Utility suffered a translation loss of over RM600 million in respect of its Yen obligations in FY99 (FY98 : RM3,506 million). Interest coverage by funds from operations is expected to average a comfortable 3.6x in the medium term. Debt service coverage will be lower, at close to 1.5x over the next three years, as more than RM7.2 billion of debts are due to be repaid within that period. Nevertheless, the inclusion of divestment proceeds of the Kapar plant estimated in excess of RM5.0 billion would improve TNB`s debt service cover over the next few years. TNB`s large capital expenditure requirement, estimated at more than RM5 billion per annum (inclusive of about RM1.5 billion for generation capex), will keep the Utility`s debt leverage at above 60% over the next three to four years. Funding for the capex will be through a combination of conventional borrowings, the capital market as well as the disposal of part of its interest in generation assets.
Going forward, TNB is expected to further improve on its financial performance with the pick up in electricity demand in the wake of the economic recovery. Regulatory support in the forms of tariff increase and/or caps on fuel costs would be essential for the Utility to strengthen its financial position.