TNB huge debt

Title: TNB huge debt and the increase electricity tariff.
TNB’s huge debt is not accumulated over a short period of time. TNB is buying most of its electricity from IPP, which enjoyed favourable rates whether the power generated is needed or not. At the same time it has to invest more capital for new clients and replace its aging assets. Everyone knows that the current electricity tariff has not increased for years and below its generation cost.
I believe that TNB should be allowed to increase tariff progressively as the power generation cost increases, so that it can continue to invest in power transmission infrastructure and keep a reasonable profit. Electricity consumer would benefit in the long run if power supply were reliable. Incidents of power failures and shortages would have a high cost to the economy and power consumers. Let TNB increase electricity tariff, so that it can set aside some money for the sorely needed maintenance and capital expenditure. Postponing the increase of electricity price would only increase Tenaga’s debt, and we consumers would still have to pay it later – at even higher price. We cannot ask Tenaga to cut cost by slashing capital expenditure, that would leave Tenaga’s capital stock in a sorry state and more expensive to maintain in the long run.
Remember California’s statewide power failures a few years ago? At that time, California state legislators did not let power companies increase power prices to consumers for some time, so there was no investment in new generating capacity nor transmission infrastructure for some time. Simply the return on investment of California’s power companies were to low, so no new investment was made. Meanwhile power demand by consumers continues to surge until there is no excess capacity left. The power failure happened on a hot summer day when almost everyone turned on his or her air conditioner to keep cool.
Its open secret that as the country’s economy grow, demand for electricity and other basic services also expected to grow at a faster rate. This growth in demand means more investments needed in electricity generation and power transmission infrastructure.
With that amount of outstanding loan, RM30 billion, a small rise in interest rate would negatively affect Tenaga’s profitability. One percent of RM30 billion is RM300 millions. If Tenaga currently makes RM1.2 billion profit, a 4 percent increase in interest rate would reverse this profit to a loss, ceteris paribus. Imagine the effect of this on Tenaga’s share price. If most GLC and publicly listed companies have high gearing like this, small wonder that BNM is reluctant to increase interest rate to keep inflation low.
However, I expect that the amount of tariff increase would be severely limited, whereby the projected revenue increase just cover the electricity cost and a bit of profit for the shareholders. Tenaga’s RM30 billion debt would have to be repaid by refinancing – either by issuing new shares or by rolling the debt papers. TNB could also convert some of its customers to shareholders by giving them warrants that can be converted into shares on payment of share premiums. This way TNB could increase its shareholders base and use the proceeds to pay off its borrowings.

Noor Yahaya Hamzah