KUALA LUMPUR: Fitch Ratings expects Tenaga Nasional to incur about RM46bil in capital expenditure from FY16 to FY19 as the power giant seeks to raise its domestic generation capacity and for maintenance.
The international ratings agency said on Wednesday Tenaga's domestic generation capacity was 11.6 gigawatts (GW) at end-December 2015 and the company plans to add 3.4GW of new domestic capacity by December 2019.
It pointed out the group also plans to pursue international opportunities, as reflected in the acquisition of a 30% stake in Turkey-based Gama Enerji in December 2015.
“Fitch has not factored any new acquisitions in its financial forecasts for Tenaga, and will analyse the impact if and when any materialise.
“Fitch expects Tenaga to generate cash flows from operations of about RM12bil per year, and to be able to comfortably fund the majority of the expected capex through internal cash generation,” it said.
The ratings agency had affirmed Tenaga's long-term foreign- and local-currency issuer default ratings (IDRs) at 'BBB+' and its foreign- and local-currency senior unsecured ratings at 'BBB+'. The Outlook is Stable.
It also affirmed Tenaga's short-term foreign- and local-currency IDRs at “F2” and simultaneously withdrew these short-term ratings as Fitch no longer considered them relevant to the agency's coverage.
Tenaga's ratings reflect its position as the owner and operator of Malaysia's electricity transmission and distribution network, its near 55% share of Peninsular Malaysia's power generation capacity and stable financial profile.
“The ratings incorporate a one-notch uplift to Tenaga's standalone rating, due to its strategic importance to the government of Malaysia (A-/Stable), which effectively owns over 60% of the company,” it said.
The government allows Tenaga to adjust its regulated tariffs every six months to reflect changes in fuel costs, subject to the government's approval.
Fitch explained the adjustment reflects the difference between actual fuel cost and the amounts stipulated in the Imbalance Cost Pass Through (ICPT) framework.
Tenaga's tariff effectively increased by 2% to 37.01sen/kWh for January-June 2016 from 36.28sen/kWh for July-December 2015 due to lower fuel-cost savings in 2H15 versus 1H15, and a smaller tariff rebate to customers.
Fitch also expects Tenaga's fuel costs to be lower than the amounts stipulated in the ICPT mechanism till 2017, and the company will pass on to customers the difference by way of tariff rebates.
This will mainly be driven by higher coal-fired generation, which accounted for about 45% of Peninsular Malaysia's electricity generation in the financial year ended 31 August 2015 (FY15).
Fitch expects the share of coal-fired generation to increase to around 55% by FYE17. Coal-fired electricity costs about 25% less than piped natural gas-based generation, and around 70% less than generation through LNG. In FY15, Fitch estimated about 40% of Peninsular Malaysia's electricity generation was via piped natural gas and 9% through LNG.
Fitch also pointed out Tenaga purchases about half of the electricity it sells from independent power producers under long-term power purchase agreements (PPAs).
The PPAs include substantial fixed-capacity payments of about 13% of Tenaga's cash operating expenses in FY15.
Tenaga has reduced its purchasing commitments to some producers after it renegotiated the purchase agreements in lieu of extensions.
“Tenaga does not directly benefit from the savings as these are payable to the government for its tariff stabilisation fund, in our view. Fitch capitalises 30% of Tenaga's fixed-capacity charge payments to independent power producers when calculating its leverage ratios.
“The amount capitalised broadly represents the unutilised proportion of the contracted capacity at the independent power producers,” it said.
Fitch assesses Tenaga's financial profile to be stronger for its standalone rating of “BBB” in the absence of any material debt-funded acquisitions.
The agency expects that Tenaga would be able to maintain funds flow from operations (FFO) adjusted net leverage below 2.5 times in the next two to three years (FY15: 1.9 times).
“However, an upgrade would be contingent on a record of consistently implementing the fuel cost pass-through mechanism, especially in an environment of rising fuel costs,” it said.
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