annual report - Tenaga Nasional Berhad

President/CEO’s ReviewRising To The ChallengeAt the onset of FY2008, the Group hadplanned to leverage on the previousyear’s notable achievements (namelyrecord profits, strong operationalperformance, and value creationinitiatives) to optimise our financialand operational performance goingforward. With the benefits of these keydrivers in place, we had also madepreparations to face higher coal pricesand absorb the full impact of new IPPTanjung Bin joining the energy industrybandwagon.However, despite kicking off to a goodstart in the first half of the year, ourprogress in the second half of FY2008was severely hampered by the sheerweight of volatile global coal pricesthat surpassed all expectations. Highercapacity payments and inflationarypressures too, impeded the Group’sprogress. As a result of having to battlethese higher external costs plus foreignexchange translation losses due to theweakening of the Ringgit against theUS Dollar and Japanese Yen, TNB’sperformance deteriorated significantlyover FY2008.[ Tenaga Nasional Berhad ] [ Annual Report 2008 ]The effects of volatile fuel prices overthe year resulted in us having to giveup almost all gains from our efficiencyinitiatives. The 10.4% increase in revenueto RM25,750.6 million in FY2008 againstRM23,320.4 million previously, wasnot enough to absorb the drastic risein fuel costs and the resultant 22.5%increase in operating expenses. As aresult, TNB’s net profit declined by36.1% to RM2,600.4 million against netprofit of RM4,067.6 million the yearbefore. The Group’s EBITDA margintoo, dropped to 29.5% against 37.6%previously, while our rate of Return onAssets declined to 4.6% against 6.3%previously.The increase in operating expensesstemmed mainly from higher electricitygeneration costs, namely IPP and fuelcosts which made up some 60.5% oftotal operating expenses. IPP costsincreased 22.4% from RM7,726.0million in FY2007 to RM9,454.1 millionin FY2008; while net fuel costs rose40.4% from RM2,959.5 million inFY2007 to RM4,156.6 million in FY2008.TNB’s total capacity payments to IPPsincreased by 22.0% from RM3,452.5million in FY2007 to RM4,213.2 millionin FY2008.This is set to increase further to RM4.4billion in FY2009 once the Jimah coalfiredpower plant is commissioned.When the Jimah power plant comesonline, our installed capacity will increaseby an additional 1,400MW therebyraising the reserve margin to 47% from40.8% currently. Come FY2009, energypayments to IPPs will also increase by63.5%, from RM5.2 billion in FY2008 toan amount in excess of RM8.5 billion.In FY2008, the Group faced thechallenge of securing coal prices at thelowest level possible amidst a backdropof highly volatile global fuel prices. Thissituation is expected to continue intoFY2009 and will add further pressure onthe Group’s profitability going forward.The second half of FY2008 also sawthe Ringgit weakening against both theUS Dollar and Yen which gave rise to atranslation loss of RM469.6 million. Thisresulted in a net translation gain of onlyRM53.2 million for the full year FY2008.The weaker currency also saw the costof coal as well as the cost of parts,equipment, services and interest, allrising in the second half of the year.36