Tnb Debt Currency

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CASE 6

Asian Journal of Case Research 1(2): 183 – 192 (2008)

Tenaga Nasional Berhad’s Debt Woes
NORDALILAH ABD AZIZa, ANNUAR MD NASSIRb*, AZHAR MOHD NASIRc, AND ABU SOFIAN YAAKOBd ABSTRACT

Currently, as a result of global price escalation of coal and fuel/gas, TNB faced a challenging time dealing with increased operational costs as well as managing the existing high debt to support its daily operations. Because of these high borrowings, TNB was exposed to excessive financial risks in particular foreign currency risk since the borrowings were mostly denominated in foreign currencies. This high borrowing had resulted in an unstable credit ratings made by domestic and international rating agencies which might affect the perception of local and foreign investors as well as the financial institutions towards the company. In addition, single customer limit was also one of the reasons why TNB had to commit foreign currencies borrowing. Other main constraints included among others security of coal supply and uncertainty in coal pricing which severely impacted TNB’s cash flows in addition to generating electricity for the nation. Due to these overriding constraints, few alternative solutions were proposed and analyzed in order to mitigate the problems. Among the solutions proposed were (i)TNB to establish policies to minimise financial risk such as credit risk policy, interest rate risk policy, liquidity risk policy, foreign exchange risk policy and permitted instruments policy; (ii) TNB must strive in the future to secure borrowing in Ringgit Malaysia which seem to be a least cost financing and (iii) few alternative solutions were proposed to overcome coal supply security and price uncertainty. Keywords: Debt management, financial risk, operational costs.

Tenaga Nasional Berhad Department of Accounting and Finance, Faculty of Economics and Management, Universiti Putra Malaysia *Corresponding author.Email:annuar@putra.econ.upm.edu.my, Phone: 603-89467600 a b, c & d

183

Asian Journal of Case Research (AJCR)

Mid February 2008, TNB’s Chief Executive Officer (CEO); Dato’ Sri Che Khalib called the top management and few representatives from the Finance Department. The meeting was held at CEO’s office and was chaired by the CEO. The highlights of the meeting include a special report presented by Chief Financial Officer (CFO); Dato’ Izzaddin Ahmad, on TNB’s financial burden due to (i) increase in fuel/gas prices from RM6.40 to RM14.31 (representing an increase of 123%) for every mmBTU and (ii) increase in price of coal of more than 170% since 2006. Based on TNB policy of adopting a diversified fuel generation mix, approximately 57% of the power plants used fuel/gas. Coal-fired plants contribute 43% and this is expected to increase as demand increases. Commenting on the electricity demand growth, the CEO mentioned that “compared to the first quarter financial year 2008 (November 2007) which reported electricity demand growth in Peninsular Malaysia at 8.6%, the second quarter (February 2008) 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 (BNM) recent downward revision of Gross Domestic Product (GDP) growth for 2008 from 6% – 6.5% to 5% – 6%.” The CEO continued by elaborating on the higher operating expenses. He was disheartened by the fact that the benefits from all 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 were beyond management’s control. Even the increase in revenue from electricity sales was insufficient to meet the increase in electricity generation cost. Furthermore, the average coal price locked in for the full year 2008 of USD75.4 per metric ton, represented a 67% increase in coal prices compared to last year. This would be an increase of approximately...
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