Operating Margins Squeezed By Higher Generation Cost And Rising Coal PricesPrint this page
Date: 14 April 2008
- Net Profit before foreign exchange translation gain of RM2,055.3 million - RM859 million increase in cost of electricity generation and higher IPP capacity payments - EBITDA margin reduced to 37.0% from 39.9% reported previously - Total debt of RM22.5 billion - Larger economic loss of RM315.5 million - Average coal price for FY2008 at USD75.4 per metric ton will result in an additional RM1.3 billion in generation cost Tenaga Nasional Berhad (TNB) today announced a net profit before foreign exchange translation gain of RM2,055.3 million for the six months of the financial year ending 31 August 2008 (FY2008). The Group's performance reflects an RM827 million increase in revenue from electricity sales as a consequence of the demand growth of 7.7% in Peninsular Malaysia and 8.2% in Sabah. At the operating level, the Group reported a 14.7% increase in operating expenses of which RM859 million was attributed to the higher cost of electricity generation from an increase in capacity payments to Tanjung Bin as well as a 13.6% increase in units despatched from coal-fired power plants. Resulting from the higher operating expenses incurred, the Group reported a 7.3% compression in EBITDA margin from 39.9% last year to 37.0%. Given the continued price volatility in the world coal market, and the risk of ensuring delivery of coal shipments, TNB has todate secured 111% of the coal requirement for FY2008 so as to eliminate the associated risks. After taking into account the most recent contracted coal agreements which had been secured, the average coal price for the full year FY2008 is expected to be at USD75.4 per metric ton. In comparison, the average coal price for the coal consumed for the 6-month period is USD53.9 per metric ton and does not reflect the recent coal contracts that have been secured at much higher prices. Effective debt liability management continues to be a key focus area. As at 29 February 2008, the Group's total debt reduced to RM22.5 billion from RM24.5 billion last year, resulting from the repayment of debt on maturity as well as the benefit of the stronger Ringgit against US Dollar. Correspondingly, the Group's gross gearing level stood at 46.2% as at 29 February 2008. Commenting on the Group's electricity demand growth, TNB's Chairman, Tan Sri Datuk Amar Leo Moggie mentioned that "compared to the 1st Qtr FY2008 which reported electricity demand growth in Peninsular Malaysia at 8.6%, the 2nd Qtr has reported a lower growth of 6.7%. Notwithstanding, we are monitoring our projected growth pattern in the coming months, especially in light of Bank Negara Malaysia's recent downward revision of GDP growth for 2008 from 6-6.5% to 5-6%." TNB's President/Chief Executive Officer, Dato' Sri Che Khalib Mohamad Noh elaborated on the higher operating expenses. He was disheartened with the fact that "the benefits from all the operational efficiency measures and cost management initiatives that had been put into place over the last few years have been over-shadowed by the increase in operating expenses that are beyond Management's control. Even the increase in revenue from electricity sales of RM827 million is insufficient to meet the increase in electricity generation cost of RM859 million. Furthermore, the average coal price locked in for the full year FY2008 of USD75.4 per metric ton, represents a 67% increase in coal prices compared to last year. This will be an increase of approximately RM1.3 billion in the cost of coal to the Group, which, coupled with the higher generation cost, will definitely place pressure on the EBITDA margin and profitability for the full year." Arising from the above, as well as the increase in the Group's weighted average cost of capital, the Group reported an economic loss of RM315.5 million for the period compared to an economic loss of RM97.9 million reported for the corresponding period last year. On the Group's Headline Key Performance Indicators ("KPIs") and Company-Wide Initiatives for FY2008, Tan Sri mentioned that, "despite the challenges currently being faced by the Group, our commitment will always be to deliver the KPI targets that have been set. As always, providing excellence in service to our customers and stakeholders will be our main driver." Amidst the current global environment, the impact of higher generation cost from further increases in IPP capacity payments and the high coal price locked in for FY2008 remain the main challenges for the Group. These will erode the Group's operating margin and profitability significantly. Given the foregoing, the Board of Directors is of the view that the prospects for the current financial year will be very challenging and that the financial results for the full year will be lower compared to the previous year. The Group will continue to drive operational efficiencies and create value through its Company-Wide Initiatives. The Board of Directors has also approved an interim dividend of 10.0 sen gross per ordinary share in respect of the financial year ending 31 August 2008. The Books Closure and Payment dates will be announced in due course.