PETALING JAYA: Tenaga Nasional Bhd's (TNB) results, due for release this week, may indicate healthy financial strength but mask the deep-seated problems at the utility firm.
With its proposal for a tariff increase still hanging in the balance, increasing payments to independent power producers (IPPs), negative cashflow and huge borrowings to fund its capital expenditure (capex), the financial picture for TNB is less than encouraging.
TNB's problems are expected to mount when the two huge IPP projects – Tanjung Bin and Jimah – come onstream.
The coal-powered plants have an installed capacity of 2,100 MW and 1,400 MW each. The commissioning of the plants would see TNB having to pay out more in the form of capacity and energy payments to IPPs.
The Tanjung Bin power plant, owned by Malakoff Bhd, is expected to be fully commissioned in August and Jimah, owned by the Negri Sembilan royal family, by 2009.
TNB's payments to IPPs are projected to go up by about 30% by financial year 2008 from what it anticipates to pay in year 2006, primarily due to the anticipated payments to Tanjung Bin.
Once the Jimah plant comes onstream, these payments are expected to rise by about 50% at the end of this decade over that incurred in 2006.
Such payments are, however, considered a credit risk by rating agencies. Moody’s Investors Service said these payments were “like fixed-charge obligations since they need to be made irrespective of whether TNB requires the IPP to generate electricity”.
Moody’s said TNB was able to recover the cost to the extent electricity was used but the company's high reserve margin raised risks, in that the capacity payments had to be made even when there was no demand for power.
TNB has been navigating power production over the years to bring its reserve margin down to the 20% to 25% range, but with both Tanjung Bin and Jimah becoming fully operational and electricity demand growth in the single digit, its reserve margin would surge towards the 40% range. This would thus be a drag on TNB instead of being a buffer.
Furthermore, the excess reserve margin would increase TNB’s exposure to rising coal prices and raise costs for TNB as the national utility company's most efficient power plants can generate cheaper electricity.
Another issue facing TNB is the proposed aluminium smelter in Perak, which might generate its own power for consumption instead of tapping into the national grid and reducing the company's huge reserve margin.
With the IPP payments taking a big chunk out of TNB’s cashflow and the company's request for a tariff increase deferred, the positive cashflow that TNB could generate from its operations is forecast to shrink over the next few years.
And what worries analysts is that the amount of cash generated by TNB is insufficient to fund the company’s normal operations.
In its financial year 2005, TNB generated about RM17bil from the sale of electricity but after paying for fuel, IPP costs, debt payments and capital expenditure, the company ended up with negative cashflow and had to dip into borrowings just to fund its normal course of business.
TNB's negative cashflow and continued borrowings are anticipated to worsen over the next few years without the tariff increase as it spends on transmission and distribution upgrades.
Its total capex needs up to 2008 could see TNB borrowing RM18bil to RM20bil for additional funding.
With total debts and capex projected to accelerate after 2008, the national utility company would probably be saddled with total borrowings exceeding RM45bil by the end of the decade.
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