Following Tenaga Nasional Berhad's (TNB) announcement that it had posted a pre-tax profit before forex translation gains of RM2,854.1 million for the nine months ended May 31, 2010, 28.8% up from the prior year corresponding period,  MARC comments that TNB's ratings will not be affected. TNB is rated AA+/ MARC-1 by MARC and the Rating Outlook is Stable.

While TNB's third quarter (Q3FY2010) net profit had risen 10.8% from the second quarter boosted by forex translation gains of RM569.1 million, the state utility had indicated that the upward trend in coal prices had recently begun to exert pressure on its margins. The impact of rising coal prices on its margins and financial results in recent quarter had been mostly cushioned by the appreciation of the ringgit against the US dollar and Japanese yen, and electricity demand growth. MARC notes that the stronger operating performance has brought about an improvement in liquidity and a net debt reduction of about RM0.3 billion during the nine-month period.

TNB's electricity tariffs were last revised in March 2009, and despite reviews every six months as fuel prices are adjusted, the utility has yet to secure approval for a tariff increase in 2010. TNB’s average electricity tariff was reduced by 3.7% in March 2009 following a reduction in natural gas prices to the power sector. Meanwhile, average coal prices have risen 15.4% from USD79.4/MT in Q1 to USD91.6/MT in Q3, although the appreciation of the ringgit against the USD has somewhat moderated the impact of higher coal prices. The cost of private power purchases, which make up about 48.0% of operating expenses, also increased, but by a smaller percentage of 6.0%   for the first nine months of FY2010 from the prior year corresponding period (FY2009: 25.1% year-on-year increase).  Given the country's current reserve margin of around 42% and the 9.9% growth in electricity demand in Peninsular Malaysia, MARC believes that firm demand growth would be critical to offsetting upward cost pressures in the absence of a near-term tariff hike. That said, the rating agency believes that prospects of a near-term tariff adjustment and continued electricity demand growth are both tied to the country's economic performance.

At this juncture, MARC regards TNB as favourably positioned within its rating category owing to its strong reported earnings and cash flow in recent quarters, in addition to its improved liquidity profile. At the same time, MARC believes that the continuing uncertainty over TNB's tariff review process could have important implications for the utility's near-term earnings, cash flow generation and financial robustness. Larger than expected debt-funded capital spending needs could also add pressure on its overall financial profile.

In MARC's upcoming review of TNB ratings, the rating agency will also focus on elements which may affect its government support assumption for the utility. These include the utility's economic importance as operator of the national grid and dominance in electricity generation in Peninsular Malaysia, in addition to past and ongoing demonstration of support. A higher assumption of potential support may provide upward momentum for TNB's long-term rating.

Downside ratings risk continues to be limited by TNB's important position in the Malaysian electricity industry, its majority ownership by the government and financial prudence.

Corporate Debt Ratings:

• RM1.0 billion Al-Bai Bithaman Ajil Notes Issuance Facility at AA+ID / Stable; and
• RM2.0 billion Al-Bai’ Bithaman Ajil Bonds at AA+ID / Stable.

Contacts:
David Lee 03-2090 2255 / david@marc.com.my;
Khairul Emran Mahmud 03-2090 2278 / emran@marc.com.my;
Sandeep Bhattacharya 03-2090 2247 / sandeep@marc.com.my.