KUALA LUMPUR (Nov 9): Standard & Poor's Ratings Services had revised downwards its outlook on TENAGA NASIONAL BHD [] to negative from stable on weakened profitability.
The ratings agency said on Wednesday that it affirmed its 'BBB+' long-term corporate credit rating and the 'axA+/axA-1' ASEAN regional scale rating on the company. It also affirmed the 'BBB+' issue rating on Tenaga's senior unsecured notes.
"We revised the outlook to negative because we expect Tenaga's weakened profitability and higher operating costs to continue to weaken its significant financial risk profile," said S&P credit analyst Rajiv Vishwanathan.
"Our view is based on our anticipation that higher fuel prices stemming from a shortage of gas supply will continue to burden the company's cash flows. Moreover, the company is likely to incur capital expenditure on its hydroelectric and thermal power projects over the next 12 months."
He said the stand-alone credit profile of Tenaga was 'bbb-'. The rating incorporated its opinion of a "high" likelihood the government of Malaysia (foreign currency A-/Stable/A-2; local currency A/Stable/A-1; axAA+/axA-1) would provide timely and sufficient extraordinary support to the company in the event of financial distress.
However, he cautioned that it could downgrade Tenaga if its relationship with the government changed materially or if there was a likelihood the extraordinary support could be reduced.
Another factor is that if Tenaga's credit protection ratios weaken due to lower demand for power than we expected, high fuel costs, or debt-funded investments in generation projects.
A ratio of funds from operations (FFO) to adjusted debt that falls below 10% on a sustained basis would indicate such weakness.
Rajiv said S&P said it could revise the outlook to stable if the Malaysian government provides some fuel price relief that enables Tenaga to recover losses from fuel supply shortages.
“We believe that a more transparent and defined tariff regime could improve the company's financial risk profile sustainably, such that its ratio of FFO to adjusted debt remains above 10%,” he said.
"We view Tenaga's business risk profile as satisfactory. The company is vulnerable to increases in costs, which it is unable to fully pass through to consumers," he added.
Of concern was that Tenaga's gas supply had been severely curtailed over the six months ended Aug. 31, 2011. The company's fuel costs have risen because it has had to use expensive alternative fuels.
Rajiv said Tenaga expected the shortage to reduce following partial restoration of its gas supplier Petroliam Nasional Bhd.'s (Petronas; foreign currency A-/Stable/--; local currency A/Stable/--; axAA+/--) Bekok C unit.
“However, Tenaga anticipates some shortfall until Petronas completely restores the unit or commissions a new liquefied natural gas terminal.
“We expect Tenaga's financial risk profile to remain significant over the next two to three years. Any interim cost-sharing solution from the government to compensate Tenaga for the losses due to curtailment of gas supply will likely reduce some pressure on cash flows in the next 12 months,” he said.
The ratings agency said on Wednesday that it affirmed its 'BBB+' long-term corporate credit rating and the 'axA+/axA-1' ASEAN regional scale rating on the company. It also affirmed the 'BBB+' issue rating on Tenaga's senior unsecured notes.
"We revised the outlook to negative because we expect Tenaga's weakened profitability and higher operating costs to continue to weaken its significant financial risk profile," said S&P credit analyst Rajiv Vishwanathan.
"Our view is based on our anticipation that higher fuel prices stemming from a shortage of gas supply will continue to burden the company's cash flows. Moreover, the company is likely to incur capital expenditure on its hydroelectric and thermal power projects over the next 12 months."
He said the stand-alone credit profile of Tenaga was 'bbb-'. The rating incorporated its opinion of a "high" likelihood the government of Malaysia (foreign currency A-/Stable/A-2; local currency A/Stable/A-1; axAA+/axA-1) would provide timely and sufficient extraordinary support to the company in the event of financial distress.
However, he cautioned that it could downgrade Tenaga if its relationship with the government changed materially or if there was a likelihood the extraordinary support could be reduced.
Another factor is that if Tenaga's credit protection ratios weaken due to lower demand for power than we expected, high fuel costs, or debt-funded investments in generation projects.
A ratio of funds from operations (FFO) to adjusted debt that falls below 10% on a sustained basis would indicate such weakness.
Rajiv said S&P said it could revise the outlook to stable if the Malaysian government provides some fuel price relief that enables Tenaga to recover losses from fuel supply shortages.
“We believe that a more transparent and defined tariff regime could improve the company's financial risk profile sustainably, such that its ratio of FFO to adjusted debt remains above 10%,” he said.
"We view Tenaga's business risk profile as satisfactory. The company is vulnerable to increases in costs, which it is unable to fully pass through to consumers," he added.
Of concern was that Tenaga's gas supply had been severely curtailed over the six months ended Aug. 31, 2011. The company's fuel costs have risen because it has had to use expensive alternative fuels.
Rajiv said Tenaga expected the shortage to reduce following partial restoration of its gas supplier Petroliam Nasional Bhd.'s (Petronas; foreign currency A-/Stable/--; local currency A/Stable/--; axAA+/--) Bekok C unit.
“However, Tenaga anticipates some shortfall until Petronas completely restores the unit or commissions a new liquefied natural gas terminal.
“We expect Tenaga's financial risk profile to remain significant over the next two to three years. Any interim cost-sharing solution from the government to compensate Tenaga for the losses due to curtailment of gas supply will likely reduce some pressure on cash flows in the next 12 months,” he said.
