KUALA LUMPUR: Fitch Ratings has revised the Outlook on power giant Tenaga Nasional Bhd
to Positive from Stable due to the improved financial profile.
The ratings agency had on Friday also affirmed Tenaga's long-term foreign- and local-currency issuer default ratings (IDRs) at “BBB+”.
The agency has also affirmed Tenaga's foreign- and local-currency senior unsecured ratings at “BBB+”.
“The positive outlook is driven by the improved financial profile following regular adjustments to its tariffs to take into account changes in generation costs over last four half yearly cycles (starting June 2015) as set out under the Incentive Based Regulation (IBR) framework,” it said.
Fitch added that an upgrade of its standalone credit profile would depend whether there was a sufficient revision of the benchmark costs under the tariff framework for the second regulatory period (2018-2020) and its consistent application.
This, it said, was especially during the upcoming 12 to 18 months when it expects generation costs to rise beyond benchmark costs.
As for Tenaga's standalone credit profile, Fitch assessed it at “BBB”, which reflected its position as the owner and operator of Malaysia' s electricity transmission and distribution network, and its near 52% share of Peninsular Malaysia's power generation capacity.
The IDRs incorporate a one-notch uplift to Tenaga's standalone rating, due to its moderate linkages to the government of Malaysia (A-/Stable), which effectively owns over 60% of the company.
Key driving factors
Regulatory framework intact: The government allows Tenaga to adjust its tariffs every six months to reflect changes in fuel and other generation cost relative to the amounts stipulated in the Imbalance Cost Pass-Through (ICPT) mechanism under the IBR framework, subject to the government's approval.
The regular and appropriate implementation of the mechanism since June 2015 has further strengthened Tenaga's financial profile beyond the range for power producers with standalone profiles of 'BBB'.
Consistent application of ICPT key: The regular and appropriate implementation of the framework benefitted from falling fuel and generation costs over the same period.
However, Fitch expects generation costs to rise beyond stipulated benchmark costs in the near term while general elections are due in June 2018, both of which could test the government's commitment to implement the ICPT mechanism.
An upgrade of Tenaga's standalone credit profile would be contingent on a sufficient revision of benchmark costs under the tariff framework for the second regulatory period and its consistent application, particularly when generation costs rise above the benchmark costs.
For January-June 2017, Tenaga continued with a rebate of 1.52sen/kWh resulting in effective tariff at 37.01sen/kWh due to lower liquefied natural gas (LNG) price, higher utilisation of coal power plants and a reduction in the use of gas for electricity generation.
The rebate also took into consideration higher piped-gas cost (RM21.20/mmbtu) with effect from Jan 1, 2017 (July-December 2016: RM19.70/mmbtu, ICPT framework: RM15.20/mmbtu) as per the government's subsidy rationalisation plan.
Higher-than-benchmark costs ahead: Fitch estimates Tenaga's fuel costs will be higher than the amounts stipulated in the current ICPT mechanism from the fiscal third quarter ending May 31, 2017 onwards.
This will be mainly driven by higher prices for both coal and gas - piped natural gas as well as LNG.
However, an increase in coal-fired electricity generation and the resultant reduction in reliance on expensive LNG will restrain growth in Tenaga's fuel costs.
No capitalised capacity payments: Tenaga's power purchase agreements (PPAs) with independent power producers (IPPs) include substantial fixed-capacity payments - about 15% of Tenaga's cash operating expenses in the fiscal year ended Aug 31, 2016 (FY16).
Fitch partly capitalises these payments when calculating Tenaga's leverage ratios, with the amount capitalised representing the unutilised portion of the capacity contracted with IPPs. This added about MYR11 billion to Tenaga's unadjusted on-balance sheet debt of MYR34 billion at FYE16.
However, Fitch will not capitalise these payments anymore because the unutilised IPP capacity has reduced significantly to a negligible amount as the increase in the country's peak electricity demand has outpaced the growth of its power generation capacity.
The reserve margin has reduced from about 50% historically to around 25% - against a minimum reserve margin requirement of 20% - and is likely to remain at around these levels. As a result, the company's expected financial metrics will improve.
The agency estimates that Tenaga would be able to maintain its FFO-adjusted net leverage comfortably below 3.0x - the level at which we may consider an upgrade - in the next two to three years (FY16: 3.0x).
Uplift for state support: The ratings incorporate a one-notch uplift to Tenaga's standalone rating due to its moderate linkages to the government of Malaysia, which effectively owns over 60% of the company, as assessed under Fitch's Parent and Subsidiary Rating Linkage Criteria.
Tenaga is the owner and operator of Malaysia's electricity transmission and distribution network, and about 52% of the region's power generation capacity.
The increase in electricity generation costs in FY11-13 due to natural gas supply disruptions and resultant reliance on oil and distillates was shared in equal proportions by the government, Tenaga and Petroliam Nasional Bhd (A-/Stable).
High capex, overseas acquisitions: Fitch expects Tenaga to have total capex of about RM45bil for FY17-FY20, mainly for increasing domestic generation capacity and maintenance.
Tenaga plans to add 3.2GW by end-2019 to its domestic generation capacity of about 12GW at end-August 2016.
The group also plans to pursue more international opportunities; Fitch expects Tenaga to take at least 30% stake in these acquisitions.
“Fitch has not factored in any 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 RM14.5bil per year, and to be able to fund the majority of the capex and investments through internal cash generation,” it said.
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