HIGHER power consumption arising from accelerating economic growth may help ease concerns over the margin squeeze suffered by Tenaga Nasional Bhd (TNB) as a result of increased operating costs.
“Margin expansion will be there if power demand grows stronger,'' said OSK Research assistant general manager Pankaj Kumar.
In addition, power generation expansion is expected to slow in the next few years.
Hence, said some analysts, the reserve margin would gradually decline because demand growth was likely to exceed supply growth.
“This would benefit TNB's bottomlines,'' said an analyst from a foreign-based stockbroking firm.
Under power purchase agreements with independent power producers (IPPs), TNB had to buy a fixed amount irrespective of power demand. More than a year ago analysts expressed concern over rising operating costs to TNB from increasingly higher payouts to IPPs as more new capacity came on stream.
And they were proven right. TNB's payouts to IPPs rose to RM5.7bil for the financial year ended Aug 30, from RM5.2bil a year ago.
Nonetheless, some analysts believe that TNB's position would improve given the firmer demand for electricity, although certain issues such as large borrowings are unlikely to be resolved overnight.
JP Morgan has re-rated TNB shares to “overweight” from “neutral” and Kenanga Research to “market-perform” from “underperform” on forecasts of higher GDP growth for the next two years.
US-based Moody's Investors Service has raised its credit rating on TNB by one notch, to Baa2 from Baa3, with a “stable” outlook, after the release of the utility giant's earnings for the financial year ended Aug 30.
Citing rising electricity demand and lower fuel costs incurred by TNB, Moody's said TNB's operating and financial profile had improved.
And the rating agency expects the group to improve further.
Power consumption is expected to grow a higher rate given the forecast stronger gross domestic product (GDP) growth next year.
In the mid-term review of the 8th Malaysian Plan, the government anticipated peak demand for electricity to rise at an annual rate of 7.2%.
At this rate, Malaysia's peak demand for power will increase to 14,531 megawatt (MW), from 12,637 MW this year. (Many analysts estimate electricity consumption growth using a multiplier of 1.5 times GDP growth. The official forecast for next year's GDP growth is between 5.5% and 6%.)
Most analysts said the forecast was fair, and pointed out that demand could be higher if the economy showed more robust growth.
However, large capital expenditure straining TNB's cashflow over the years – and resulting in mounting borrowings – had caused the heavyweight CI-linked counter to be less appealing compared with its peers on the KLSE.
TNB’s total debt rose to RM30.9bil for the financial year ended Aug 31, from RM29.1bil a year before. About half its loans is in ringgit, 34% in US dollars, 10.2% in yen, 4.4% in British pounds, and 1.9% in euro.
Nevertheless, Moody's noted that TNB would be able to reduce its capital expenditure on generation capacity considering its current power reserves. In fact, TNB's capital expenditure fell to RM3.6bil in financial year 2003 from RM4.5bil previously.
In the long term, other positive developments in the utility giant are its change in fuel mix for power generation and its ability to negotiate a lower cost in new power purchase agreements with IPPs.
TNB has tried to use more coal to generate electricity – replacing gas, which is more costly – to trim its fuel costs.
The increased use of coal in Tenaga's fuel mix would help support the company's future operating performance, said Moody's.
Fuel accounts for nearly 18% of TNB's operating costs.
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