MARC revises TNB outlook to stable

KUALA LUMPUR: Malaysian Rating Corporation Bhd (MARC) has revised its outlook on TENAGA NASIONAL BHD [] (TNB) to stable from developing to reflect expectations of more certainty with regard to electricity demand and cost recovery in the coming year.

The rating corporation also affirmed its AA+ rating on TNB's issuer rating, in addition to reiterating its AA+ID ratings on the utility's Islamic debt ratings, namely the RM1 billion Al-Bai Bithaman Ajil Notes Issuance Facility and the RM2 billion Al-Bai' Bithaman Ajil Bonds.

Additionally, MARC affirmed its MARC-1ID/AA+ID rating on the RM1.5 billion Murabahah Commercial Papers and Murabahah Medium-Term Notes.

"MARC notes a reversal in earlier month-on-month declines in electricity unit sales and believes that TNB's current credit metrics remain consistent with its ratings," it said in a statement yesterday.

It said the affirmed ratings reflected TNB's status as the country's fully-integrated utility company, with its dominant position in electricity transmission and distribution in Peninsular Malaysia, satisfactory operating profile and moderate gearing level, as well as its 84% ownership by the Malaysian government and its support through fuel price subsidies and development grants.

"However, TNB's profitability remains exposed to fuel cost volatility and rising electricity generation costs which underscores the importance of timely increases in regulatory tariffs to avoid further erosion in its operating margins and associated credit protection measures."

Despite this, the rating corporation said it considers the domestic tariff-setting regime as being "generally supportive" of TNB's credit quality. It said ongoing issues that may impact TNB's credit risk profile included its ability to minimise the effect of rising electricity generation costs.

"MARC observes a decline in TNB's average per unit margin for FY2009, to 1.6 sen/kWh from 1.8 sen/kWh in FY2008, notwithstanding higher tariff levels in FY2009," it said, adding the average selling price per unit of electricity was 32 sen/kWh in FY2009, from 26.7 sen/kWh in FY2008.

"Total cost of purchased power from independent power producers rose by 25.1% while fuel costs rose 23.8%, outpacing revenue growth of 16.3%. Further increases in gas and coal prices will negatively affect TNB's margins."

MARC said TNB was expected to continue to reduce its debt through its free cash flow, which remains relatively strong. Its debt service cover ratio (DSCR) improved to 4.21 times due to lower finance charges and debt repayment.

"TNB's debt leverage, as measured by the ratio of its debt to equity, declined marginally to 0.87 times from 0.88 times in FY2008 following continued repayment/repurchase of existing debt as well as higher shareholders' funds."