Fitch Affirms Malaysia's Tenaga at 'BBB+'; Outlook Stable (5347)

The following was released by the rating agency
SINGAPORE/HONG KONG: Fitch Ratings has affirmed Malaysia-based Tenaga Nasional Berhad's (Tenaga)
Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at
'BBB+' and its Short-Term Foreign and Local Currency IDRs at 'F2'. The
Outlook is Stable. At the same time, Fitch has affirmed Tenaga's
foreign and local currency senior unsecured ratings at 'BBB+'.
The
affirmation reflects Fitch's view that Tenaga will be able to maintain
a financial profile appropriate for its ratings on expected
improvements to cheap natural gas (NG) availability from 2013 onwards.
Tenaga was affected by NG shortages due to maintenance work carried out
by its supplier, PETRONAS ('A'/Stable), from Q3 FY11 (financial year
end August). As a result, it received less than 1,000 million standard
cubic feet per day (mmscfd) of NG compared with its needs of around
1,250mmscfd, forcing it to use distillates to generate power, which is
over 4x more expensive than subsidised NG. This was a key factor in the
increase of its generation costs to MYR0.141/kwh and MYR0.148/kwh in
FY11 and in the nine months to May 2012, from MYR0.108/kwh in 2010.
These
additional costs, which Tenaga could not pass on to customers, were
partially covered by a compensation mechanism between Tenaga, PETRONAS
and the government of Malaysia ('A-'/Stable) - which effectively owns
around 82.5% of Tenaga. Tenaga has received MYR2.39bn in compensation
in Q312 and expects to receive further compensation for additional
losses incurred during the nine months to May 2012. This arrangement
expires in September 2012, around the time PETRONAS is expected to
increase NG supply availability.
As a result of increased
generation costs, Tenaga's adjusted debt net of cash to fund flow from
operations (FFO) in FY11 increased to 4.6x from 3.0x in FY10. The
company's credit metrics should see a material improvement in FY12 once
compensation for the additional generation costs for both FY11 and FY12
is reflected in the FY12 results. Fitch capitalises half of Tenaga's
fixed capacity charges to independent power producers (IPP) to arrive
at the company's adjusted financial leverage; the amount capitalised
represents the average unutilised proportion of IPP capacity on an
annualised basis.
Because Malaysia's coal-fired power generation
capacity is near to being fully utilised, additional generation would
be via existing gas power plants. Given the limited supply of NG in
Malaysia, the majority of Tenaga's incremental electricity sales in the
next two to three years would be through PETRONAS' LNG imports, which
at market prices would be about 3x more than Tenaga's average
generation costs. It is not yet clear if LNG supplied to the power
generation sector would be subsidised.
Fitch believes that
Tenaga should be able to maintain its current ratings in the next two
to three years even if it were to source LNG at market prices without a
subsidy, provided increases in generation volumes are moderate (around
4%) and PETRONAS would increase NG supply volumes to 1,100mmscfd from
FY13 onward. However, this would leave Tenaga with little headroom
under its current ratings. The company expects additional coal and
hydro generation capacity in 2015/2016, which should help reduce
generation costs in the long term. The company may also benefit from
renegotiation of first generation power purchase agreements with IPPs
as they approach expiry. These IPP capacities are expensive for Tenaga
and account for around 47% of its Malaysia's total power capacity
currently.
Tenaga's ratings reflect its position as the sole
electricity distributor and transmitter in Peninsular Malaysia, as well
as its around 48% share in power generation. The ratings also factor in
a notch of government support given its strategic importance to
Malaysia, as per Fitch's parent and subsidiary rating linkage criteria.
Tenaga's
standalone 'BBB' ratings remain constrained by a lack of cost
pass-through mechanism. While Malaysia introduced a fuel cost
pass-through mechanism in 2011, this has been put to test only once and
is mainly for passing on scheduled increases in NG costs. NG accounts
for about 45% to 55% of Malaysia's power generation.
What could trigger a rating action?
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
-
A positive rating action is not expected until a transparent and an
effective cost pass-though framework is implemented, reducing Tenaga's
price risks. Negative: Future developments that may, individually or
collectively, lead to negative rating action include:
- Leverage as measured by net adjusted debt to FFO increasing above 4.75x on a sustained basis
- Funds flow from operations to fixed charges falling below 2.5x on a sustained basis
- Evidence of weakening ties with the governmet. - Reuters