Malaysian Rating Corp Bhd (MARC) has affirmed Tenaga Nasional Bhd’s (TNB) corporate credit rating of AAA and sukuk rating of AAAIS on its outstanding RM2 billion Al-Bai’ Bithamam Ajil bonds.
The rating agency said the outlook is ‘Stable’, while 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 national principal energy provider.
The support assessment also considers the government’s indirect majority ownership and its golden share in TNB, which provides considerable leeway to influence the utility company’s business and financial profiles.
“The ‘Stable’ outlook reflects our expectations that the government support assumption will be sustained in the next 12 to 18 months in view of TNB’s strategic importance to the nation’s energy security,” MARC said in a statement last Friday.
It added that any weakening in TNB’s debt protection measures and/or liquidity buffer would exert pressure on its standalone rating.
“TNB’s credit strength reflects its monopolistic position in electricity transmission and distribution in Peninsular Malaysia and Sabah, its significant electricity generation capacity and strong operational track record,” it said.
The agency noted that the utility company’s generation capacity had increased to 12,904MW, or 56.3% of total installed capacity, in Peninsular Malaysia in 2016.
This was following the completion and commissioning of the 250MW Hulu Terengganu hydro power station, 1,071MW Prai gas-fired power station, 375MW Connaught Bridge gas-fired power station and 186MW Ulu Jerai hydro power station.
Electricity demand growth in Peninsular Malaysia, which had been on the decline since 2012, improved to 4% during the financial year ended Aug 31, 2016 (FY16), MARC said.
“The growth was supported by warm weather conditions in the third-quarter of FY16 (3Q16), driving TNB’s revenue and pretax profit to RM44.5 billion and RM8.1 billion respectively, versus RM43.3 billion and RM7.1 billion in FY15,” it said.
The company’s performance was also supported by the declining price trend of coal and liquefied natural gas since 2012 with total fuel cost falling 7% year-on-year (YoY) to RM15.1 billion.
It further benefitted from the implementation of the imbalance cost pass-through tariff mechanism, which acts as a buffer against any fluctuation in fuel costs.
Its cash generation ability remains fairly strong, as reflected by its net cashflow from operations of RM13.3 billion compared to RM11.4 billion in FY15.
Free cashflow improved significantly but remained negative at RM99.6 million due to high capital expenditure (capex) and large dividend payment of RM1.64 billion.
“TNB’s liquidity position has come under pressure from continuous investments in new generation capacity. We expect the heavy capex requirement of RM33.3 billion in the next five years and the new dividend policy to exert further pressure on its liquidity cushion,” MARC said.
The group’s debt-to-equity (DE) ratio weakened to 0.77 times in FY16 from 0.66 times in the previous year due to a 28.2% YoY rise in total borrowings to RM40.3 billion in FY16, mainly from the sukuk issuance for Jimah East Power of RM8.98 billion and the acquisition of GAMA Enerji AS for RM1.2 billion.
MARC said the DE could rise further in FY17 after the issuance of US$750 million (RM3.3 billion) sukuk under the US$2.5 billion multi-currency sukuk issuance programme to mainly fund its overseas ventures.
Although the company’s debt-to-capital employed ratio increased slightly from the previous year, it remained low at 0.4 times below its optimal level at 0.55 times.
The rating agency said TNB’s recent 30% stake purchase each in GAMA Enerji and GMR Energy Ltd as well as the proposed subscription of 50% stake in Vortex Solar Investments SARL will expand the group’s global footprint and broaden its earnings base going forward.
Its foreign currency denominated borrowings, which declined 4.5% in FY16, comprise only 17.4% of its total borrowings, of which yen comprised 8.7%, US dollar 8.5% and others at 0.2%.
The company hedges its foreign currency risk by requiring a minimum of 50% of its known foreign currency exposure to be hedged for up to 12 months via forward exchange and currency options contracts.