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May 08 2013

RAM Ratings reaffirms TNB's AAA sukuk rating

RAM Ratings has reaffirmed the AAA long-term rating of Tenaga Nasional Berhad's ("TNB" or "the Group") USD500 million equivalent Murabahah Medium-Term Notes Programme (2005/2025); the long-term rating has a stable outlook. Based on RAM's methodology on government-linked entities, there is a very high likelihood of extraordinary government support for TNB in the event of financial distress, given the Group's strategic role as the national electricity company.

The rating reflects TNB's strategic position as the national electricity company, with a near-monopoly over the transmission and distribution of electricity across Peninsular Malaysia and Sabah. The Group also plays a critical role as the sole off-taker for the generating capacity and electrical energy produced by all the independent power producers ("IPPs") in Peninsular Malaysia. The Group remains a dominant player in the domestic power-generating business, controlling 53% of Peninsular Malaysia's generating capacity as at end-August 2012; this will increase to around 57% when 4 of its new power plants commence operations in 2015/16.

The utility giant is viewed to have strong government support. In addition to holding a special share, the Government and its various agencies also own an aggregate 76%-stake in TNB. Subsidised gas and periodic tariff reviews (in tandem with increases in the price of natural gas) underline the implicit support received by TNB. Meanwhile, the Government's explicit financial support has taken the form of cash compensation resulting from a fuel-cost-sharing mechanism where the Government, Petroliam Nasional Berhad ("Petronas") and TNB each bear a third of the additional fuel costs incurred due to the industry's gas shortage. As at end-February 2013, the amount of fuel-cost compensation recognised was about RM3.73 billion, with RM3.09 billion already received from the Government and Petronas. TNB has confirmed that such compensation will be extended until the Malacca regassification terminal commences operations and that is expected to resolve the power sector's gas shortage.

Nevertheless, TNB is exposed to fuel-cost pressures given the lack of any automatic tariff revision or fuel-cost-pass-through ("FCPT") mechanism. The impact of such pressures is underlined by the present curtailed supply of gas. Going forward, volatile fuel prices will be a key challenge for the Group, as natural gas is envisaged to be procured at market prices along with coal. In this regard, the implementation of an automatic FCPT mechanism is crucial towards preserving the utility giant's financial profile. However, the timing of such implementation remains uncertain.

TNB's debt load is expected to augment in tandem with Malaysia's plant capacity. As at end-February 2013, the Group's debt level had increased to RM21.68 billion (end-August 2011: RM19.05 billion), following the drawdown of a RM4.85 billion facility for the expansion of its Janamanjung plant, albeit moderated by some repayments and lighter yen-denominated borrowing amid the strengthening of the ringgit against the yen. Nonetheless, the recognition of alternate-fuel-cost compensation had boosted accumulated profits, easing the Group's adjusted gearing ratio to 1.54 times as at end-February 2013 (end-August 2011: 1.65 times). Moving forward, as the nation raises its power-generation capacity, TNB's leverage is envisaged to increase, either via additional debt drawdown if it wins the bids, or through adjustments for additional future capacity-payment obligations to the new IPPs.

Media contact
Chin Wynn
(603) 7628 1170
chinwynn@ram.com.my

© Press Release 2013


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