If Energy Crisis Occur, What alternative do we have???

Thestar: Saturday November 5, 2011


Gas shortage may affect TNB in the long term

By YAP LENG KUEN

lengkuen@thestar.com.my

TENAGA Nasional Bhd's (TNB) deteriorating cash position, arising from the gas shortage situation, has raised concerns over a possible impact on the RM26bil worth of bonds issued by the independent power producers (IPPs).


In the short term, there may not be much impact as the IPPs enjoy “iron-clad'' contracts with TNB. However, over the long term, there could be delays or other requests that could affect the payment stream to the IPPs.

Financing of the power purchase agreements of IPPs may be in jeopardy especially if banks scrutinise the financial position of TNB, the paymaster. If the gas shortage situation worsens, and TNB has to keep buying distillates, banks will eventually pore through TNB's cash position more closely. Worse still, if TNB issues bonds which is long-term debt to fund operating costs, the mismatch may be a concern.


Risk to IPPs

In terms of default, there is hardly any risk, says an analyst from Maybank Investment Bank (IB) Research.

“Their bonds are iron clad. Under their contracts, they will still receive contractual payments, irrespective of whether there is enough gas or the amount of power generated,'' he says.

Chong: ‘The debt ratings of IPPs are generally capped by TNB’s rating.’

But there will be impact on the financial covenant in terms of how much profit they will make to repay the bonds.

Known as the interest cover and debt service coverage ratio, this amount may be reduced in view of the current gas shortage problem, and therefore may pose a slightly higher risk to the IPPs which then may have to pay higher interest rates on their bonds.

Among the IPPs, only YTL Power enjoys fixed payments; the others receive their payments in two tranches a fixed entitlement and variable earnings depending on the amount generated.

“For the next six to eight months, there will be no impact on rating of IPPs.

“After that, if there is no resolution of the gas shortage situation, it might trigger credit concerns,” says Sandeep Bhattacharya, vice-president of ratings, Malaysian Rating Corp (MARC).

The ratings for IPPs are capped by TNB's credit profile; if TNB's credit rating comes down, it may likely have a domino effect on IPP ratings.

The capacity payments may still be made but there could be delays or even requests for cuts, the latter of which I don't think will happen,” says an analyst.

RAM Ratings head of infrastructure and utilities ratings Chong Van Nee says: “The debt ratings of IPPs are generally capped by TNB's rating. That said, any downward rating adjustment for TNB will not necessarily change the IPPs' debt ratings.”

“It must be noted that the debt ratings of IPPs take into consideration several factors other than TNB's credit strength such as the IPP's level of debt servicing ability, the relevant financial covenants, regulatory developments, single site risk and other factors unique to the respective IPP,” Chong adds.

Chris Eng, director at OSK Research, doubts if the gas supply shortage issue will cause too much damage to first generation IPPs which enjoys higher capacity charge rate.


Higher risk on TNB's debt rating

The Maybank IB analyst reckons that if there is no resolution to the problem over the next 12 months, there is a high possibility that TNB's rating may come down.

“Rating agencies typically do annual revisions and periodic assessments,” he says. “In the case of annual reviews, they will look at what happened in the past 12 months and what can possibly happen over the next 12 months.”

In its latest report, Maybank IB Research estimates that TNB can only sustain for four to five quarters at the current rate it is generating power from the more expensive oil and distillates.

“TNB has incurred a cash burn of RM4.386bil in financial year (FY) 2011, reducing its cash balance to only RM3.954bil.

Sandeep: ‘If there is no resolution of the gas shortage situation, it might trigger credit concerns.’

“Should the natural gas supply curtailment persist at the rate experienced in the fourth quarter of FY11 (867 million std cu ft per day mmscfd and power demand of 11,883 GW per hour), we estimate it will take four to five quarters before TNB fully depletes its cash reserves,” the report says.

Moreover, TNB needs to make 10% to 20% upfront payment for its capacity expansion projects, and this comes from its cash reserves.

Alex Goh, senior analyst at AmResearch, is confident the Government will step in to save the national utility.

“It cannot afford to just do nothing,” he says. “It is an economic and security concern.”

“TNB's net gearing now is 0.4 times compared with two times back in 2002/03. It was much higher then but there was no downgrade. TNB is largely owned by government investment bodies and tariffs are controlled by the Government whose duty is to ensure a stable supply of power,” an analyst with a bank-backed brokerage says.

Chong of RAM Ratings says: “We are aware that TNB's financial position is currently affected by the gas supply curtailment issue and this is expected to continue to plague TNB for its next two financial quarters.”

By then, she expects the gas curtailment to be resolved once the regasification terminal in Malacca comes onstream.

“RAM Ratings will continue to monitor the extent of this situation and its consequent impact on TNB's credit profile,” she says.

TNB's debt issue is rated triple A (with stable outlook) by RAM Ratings, reflecting its position as Malaysia's national electricity company with a near-monopoly over the transmission and distribution of electricity across Peninsular Malaysia and Sabah.

TNB also plays a crucial role as the sole offtaker for the generating capacity and electrical energy produced by all the IPPs in Peninsular Malaysia.

“In view of the strategic nature of TNB's role as Malaysia's national electricity company, it enjoys strong implicit support from the Government, that is, its major shareholder,” she says.

Sandeep of MARC says the rating agency is monitoring the measures taken to address the gas shortage problem and the related cash depletion.


Options for TNB

“It is possible that TNB is in negotiations with the Government which needs to keep TNB, its monopoly in utilities, in good shape,” says an analyst. “We need to wait six to eight months for an idea of the measures to be undertaken to solve the problem.”

“It is premature to judge based on one event,” Sandeep says. But analysts do say that seen in isolation, TNB's credit profile appears to be in jeopardy. But viewed against the measures to be undertaken especially by the Government, a different picture might emerge.

The most obvious solution is for the Government to step in and provide a long-term loan to TNB.

But analysts are playing down the prospects of a cash injection at this juncture as TNB is a corporate entity and there should be some accountability in terms of managing the company.

“This (the gas supply shortage issue) is something out of TNB's control, and it is not that they are losing money on operations,” he adds.

“It is a handicapped situation,” says the analyst from Maybank IB Research. “It is beyond TNB's ability to do anything and it has no choice but to absorb the cost.

“The Government must come in to solve the problem, seeing that the proposal for cost-sharing is not working,” he adds.

Eng of OSK Research says: “While the gas issue should be less critical in 2012 with Bekok coming onstream and the maintenance of gas platforms coming to an end, there will still be a shortage of gas which is unfair to TNB.”

“Compensation from Petronas or the Government is the right way to proceed. TNB should not have to raise cash via a rights issue which will be unfair to its shareholders.”

Analysts and debt market players note that given the market situation, TNB's financial flexibility seems to be high. “This is an industry issue,” says a bond expert. “I have dealt with TNB for the past 15-20 years and note that it is a well-managed company. In fact, at one time, they were able to bring down their debt levels drastically. The market is flush with liquidity. If TNB wants me to raise cash for them, I would be willing to do so.”