Monday, Feb 26, 2007
MARC has reaffirmed Tenaga Nasional Berhad’s (TNB) issuer and corporate debt ratings. The reaffirmation of the ratings reflects TNB’s strategic and important role to Malaysia’s economy and national security and its dominant role in generation. TNB’s virtually monopolistic position in the transmission and distribution of electricity in Peninsular Malaysia and Sabah, coupled with the majority government ownership as one of the government linked companies (GLC), improved financial performance and operational efficiency are also reflected in these ratings. The key moderating factors include the need to fulfill its high capital expenditure requirements; vulnerability to increase in fuel price and the uncertain ability to pass through cost increase to end consumers arising from any adjustment of gas subsidy from PETRONAS. Nonetheless, any adjustment to the gas price following the expiry of the pricing agreement with PETRONAS is expected to be part of the industry proposed rationalization. The ratings have been accorded a Stable Outlook.
TNB continues to control the majority or 61.5% of the country’s installed capacity and holds a monopolistic position in the distribution of electricity in Peninsular Malaysia. Electricity sales in FY2006 climbed by 7.5% to RM19.7 billion spurred by the growth in electricity demand and the long overdue new tariff structure which was implemented effective 1 June 2006. Driving electricity sales were the commercial and industrial sectors, which collectively accounted for 75.8% of the utility’s total unit sold in FY2006.
The increased operating efficiency, the various cost management measures across the Group and the higher tariff resulted in higher operating profit margin of 19.4% compared to 16.5% in the previous year. Whilst total revenue increased by 7.4% in the last fiscal year, total operating cost increased at a lower rate of 4.4%. The key technical indicators for operational performance such as the Unplanned Outage Rate, System Minutes and Generation Availability displayed improvement over the years and better than the set targets. A further boost to the bottom line is the foreign exchange gain of RM325 million which improved TNB’s pre-tax profit by a hefty 51.3% to RM2,752 million in FY2006.
Peak demand of 12,990 MW registered in August 2006 translated into a lower reserve margin of 36% in FY2006 compared to 42% in the last financial year. Based on the estimated electricity demand growth of 7.8% per annum going forward, and the new planting-up programme over the next few years, the reserve margin is expected to be stable in the medium term. The commissioning of coal-fired, base-load Tanjung Bin Power Plant in FY2007, and Jimah Energy Ventures in FY2009 will result in higher capacity payment going forward. The borrowings of the Group has reduced from RM30 billion last year to RM27 billion in FY2006 with improved debt to equity ratio from 1.9 times in FY2005 to 1.4 times in FY2006. While the high borrowings are a norm for a highly capital intensive industry, the management’s continuous debt management in gradually reducing the Group’s exposure to foreign borrowings, rebalancing its debt maturity profile with about 60% being repayable after five years, higher proportion of fixed rate borrowings vis-à-vis floating rate to minimize interest rate risk, is viewed positively. The monopolistic nature of its business coupled with solid Government backing will strongly support the economic viability of the Group and provide TNB with superior financial flexibility in terms of easy access to the capital markets and its ability to refinance its borrowings.
MARC views the proposals to rationalise the whole industry as somewhat positive to the Group, and assuming that the Group will continue to maintain the near monopoly position in the transmission and distribution going forward. However the full impact is not expected to be immediate due to the high degree of complexity involving various players, concessions and legal implications.
Exhibit 1: Selected Indicators
| FYE 31 August | 2006 | 2005 | 2004 | 2003 | 2002 | 2001 |
| Revenue (RM million) | 20,384 | 18,978 | 17,712 | 16,458 | 15,375 | 14,363 |
| Pre-tax profit (RM million) | 2,752 | 1,819 | 1,483 | 1,649 | 1,514 | 2,193 |
| Operating profit margin (x) | 19.4 | 16.5 | 18.8 | 17.4 | 16.6 | 17.7 |
| OPBIT interest coverage (x) | 2.6 | 2.0 | 2.5 | 2.2 | 2.3 | 2.0 |
| Debt to equity (x) | 1.4 | 1.9 | 2.2 | 2.2 | 2.1 | 1.7 |
| Shareholders’ funds* (RM million) | 19,547 | 16,201 | 14,890 | 14,043 | 14,192 | 16,560 |
| Total Debt (RM million) | 27,116 | 29,988 | 32,487 | 30,913 | 29,228 | 28,316 |
*including minority interest