MARC has affirmed Tenaga Nasional Berhad’s (TNB) corporate credit rating of AAA and sukuk rating of AAA_IS on its outstanding RM2.0 billion Al-Bai’ Bithaman Ajil Bonds. The ratings outlook is stable. The ratings incorporate a two-notch uplift from TNB’s standalone corporate credit rating of AA/Stable to reflect MARC’s assessment of a high likelihood of government support premised on the company’s critical role as the country’s principal energy provider. The support assessment also considers the government’s indirect majority ownership in TNB which provides considerable leeway to influence the utility company’s strategic direction.

TNB’s credit strength reflects its monopoly on electricity transmission and distribution in Peninsular Malaysia and Sabah, its significant electricity generation capacity and strong operational track record with a generation capacity of 56.2% total installed capacity in Peninsular Malaysia of 22,911-megawatt (MW) in the financial year ended August 31, 2017 (FY2017). TNB’s plant operational efficiency has shown further improvement as demonstrated by the equivalent availability factor of 89.5% (FY2016: 89.3%) and equivalent unplanned outage rate of 1.9% (FY2016: 3.7%). TNB’s system average interruption duration index (SAIDI) increased marginally to 50.24 minutes (FY2016: 49.71 minutes) while transmission & distribution losses stood at 7.5% (FY2016: 7.4%), indicating that TNB’s distribution system reliability may have reached its optimal level.

Electricity demand growth is lower than forecast in 2017 with Peninsular Malaysia growing by 1.0% y-o-y and Sabah by 0.2% y-o-y. Despite lower electricity demand growth, TNB reported revenue increase of 6.5% y-o-y due to lower over-recovery from the Imbalance Cost Pass Through (ICPT) mechanism amounting to RM0.2 billion as well as higher unbilled revenue of RM0.4 billion in FY2017. Profit after tax declined by 5.6% due to higher finance cost as TNB undertook additional borrowings in addition to incurring higher tax expenses. Operating cost increased y-o-y to RM39.1 billion from RM36.2 billion in line with higher average coal prices as well as coal consumption. To counter stagnant demand in the domestic market, TNB has been expanding internationally as part of its five-year expansion plan. In FY2017, the group acquired a 50% stake in a 365MW solar photovoltaic portfolio in the United Kingdom and won a US$176 million operations & maintenance contract in Pakistan.

In FY2017, net cash flow from operations (CFO) declined to RM12.6 billion compared to RM13.3 billion in FY2016 backed by higher receivables and lower payables. This led to a lower CFO interest coverage ratio of 10.78 times. Negative free cash flow widened to RM2.9 billion mainly due to increased capex and higher dividend distribution. TNB’s new dividend policy is based on 30%-60% of consolidated net profit attributable to shareholders after minority interest, excluding extraordinary non-recurring items at 61 sen per ordinary share (FY2016: 32 sen per ordinary share). Additionally, TNB’s total borrowings also increased by 9.7% y-o-y to RM44.2 billion in FY2017 from RM40.3 billion. This is mainly due to a RM2.0 billion sukuk issuance as well as US$750.0 million multi-currency medium-term notes to finance capex, investments, working capital requirements for TNB power plant projects and more. MARC would also like to highlight that TNB’s contingent liabilities, which include liquidity support provided to its subsidiaries in the form of completion support and rolling guarantees on power plant projects, remain a potential concern.

Furthermore, TNB’s capex increased by 5.9% to RM12.1 billion in FY2017 compared to RM11.4 billion in FY2016. Capex was mainly concentrated on new generation capacity projects at 45.1% while the remaining bulk of capex comprised recurring generation (4.6%), transmission (17.7%), distribution (25.2%) and others at 7.3%. Projects in the pipeline include the Southern Power Generation, Jimah East Power and TNB Sepang Solar power plants which are expected to be completed between 2018 and 2020.

The stable outlook reflects MARC’s expectations that government support will be sustained in the next 12 to 18 months in view of TNB’s strategic importance to the nation’s energy distribution. Any weakening in TNB’s debt protection measures and/or liquidity buffer would exert pressure on its standalone rating.

Contact:
David Lee, +603-2717 2955/ david@marc.com.my.