KUALA LUMPUR (May 31): Tenaga Nasional Bhd (KL:TENAGA), the sole electricity transmission network operator in Peninsular Malaysia, may employ the imbalance cost pass-through (ICPT) mechanism to shield its earnings and cash flow stability against fuel and generation cost fluctuations, said S&P Global Ratings. 

The ICPT, which allows TNB to pass through uncontrollable fuel and generation costs after a six-month lag (subject to government approval), may ensure the utility company to have an adjusted earnings before interest, taxes, depreciation, and amortisation (Ebitda) margin hovering above 30% over the next three years, S&P said. 

"We project ICPT recoveries of RM6 billion in 2024, and RM2 billion in 2025, based on our assumption that coal prices will trend down over the next few years," S&P added.  

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Notably, TNB has utilised this mechanism during the pandemic years of 2020-2021, and again during 2022-2023, a time of high fuel and generation costs.

In 2023, TNB recovered RM10.6 billion in higher uncontrollable costs, with RM4.7 billion funded by the government and the remainder covered by tariff surcharges.

The rating agency added that it did not anticipate any negatives from the next regulatory period (RP4) from January 2025 to December 2027 that would affect the framework. 

"Our base case assumes a weighted average cost of capital of 7.3% (the same as the current period) and regulated capital expenditure of RM8.5 billion annually over the RP4," it added. 

This will ensure that TNB's operating cash flows remain predictable and stable, supported by regulated returns, limited demand risks, and the ability to pass through actual fuel and generation costs, it noted. 

Following this, S&P revised its rating of TNB’s stand-alone credit profile (SACP) from ‘bbb-’ to ‘bbb’, saying the ICPT mechanism will continue to underpin stable and predictable cash flows for the company. 

Consequently, TNB’s outstanding notes and US dollar-denominated senior unsecured medium-term note programme are now rated ‘A-’ (up from ‘BBB+’) by the rating agency. 

Its long-term issue rating for TNB Global Ventures Capital Bhd’s wakala trust certificates and multi-currency sukuk issuance programme have been upgraded to ‘A-’.

"We believe TNB can keep its adjusted ratio of funds from operations above 15% over the next 12 to 18 months," S&P said, while noting that TNB can manage under- or over-recovery of fuel costs through tariff adjustments. 

https://www.theedgemarkets.com/node/713773