MARC Ratings has affirmed Tenaga Nasional Berhad’s (TNB) corporate credit rating at AAA with a stable outlook.
The affirmed rating remains driven by TNB’s status as the principal electricity utility in Malaysia with a monopoly on electricity transmission in Peninsular Malaysia and Sabah, as well as its significant electricity distribution and generation capacity. This is tempered by the potential ceding of some market share in electricity sales upon liberalisation of the electricity industry. The rating also incorporates a two-notch uplift based on our assessment of a very high likelihood of government support given its critical role as the country’s principal energy provider and key strategic asset. This is evidenced by allocations to fund imbalance cost pass-through (ICPT) cost recovery across 2022 and 1H2023 as well as RM6.0 billion in guarantees on part of the group’s borrowings to mitigate the impact of rising fuel costs on its financials. The extended support is also reflected by the government’s commitment to uphold the ICPT mechanism that shields TNB from fuel price volatility.
MARC Ratings notes that full recovery of electricity demand to pre-pandemic level has contributed to TNB’s revenue growth. Revenue rose by 5.7% y-o-y to RM50.9 billion during 2022. However, cash flow from operations (CFO) was affected by higher fuel costs during the period. This has been alleviated by ICPT cost recovery payments that have been progressively received from the government. As current fuel prices remain elevated, we view that additional government support would be in place in the upcoming ICPT review period in the absence of sufficient ICPT tariff surcharges.
In line with TNB’s decarbonisation agenda, the group is expanding its generation capacity in clean energy sources, namely hydro, solar and gas with hydrogen-fired projects. These projects would be earnings accretive with cash flows sufficient to cover borrowings incurred to fund them. Largely due to working capital requirements related to ICPT, total borrowings rose to RM63.9 billion as at end-December 2022. The group maintains an adequate liquidity position with cash and bank balances of RM4.9 billion. Annualised debt-to-OPBITDA remains healthy at 3.07x.