Utility giant Tenaga Nasional said today its net profit in its second quarter to February rose 15 percent due to forex gains and higher sales of electricity.

Its second quarter net profit rose to RM339.5 million due to forex gains of RM126.1 million, it said. Second quarter sales amounted to RM4.83 billion compared with RM4.64 billion a year ago while pretax profit rose to RM542.7 million from RM507.2 million.

For the first-half to February, sales stood at RM9.74 billion against RM9.18 billion a year earlier while net profit surged to RM995.1 million from RM303.6 million. orex gains for the fiscal first-half came to RM347.7 million against a forex loss of RM395.7 million in the corresponding period a year ago.

In notes accompanying the results, Tenaga said the improved first-half results stemmed from higher electricity sales and the strengthening of the ringgit against major currencies which resulted in foreign exchange gains.

It said initiatives carried out by the management towards boosting efficiency and productivity and cost management efforts helped in containing the impact of higher fuel prices and increased operating costs.

Looking ahead, Tenaga said it expects growth in electricity demand to be stable amid continuing growth in the Malaysian economy.

"However, as prices are expected to rise which will have a significant impact on the operating costs, the board is of the view that such circumstances may pose a challenge to the performance of the group for (full-year) 2006," it said.

Tenaga said it has submitted a controversial tariff review proposal to the government in order to address its current financial position.

It added that failure to secure a tariff review will have a negative impact on the company's financial position in the medium and long term.

Excessive payments to IPPs

According to a report yesterday in the Star , Tenaga's payments to independent power producers (IPPs) are projected to go up by about 30 percent by 2008, and by 50 percent by the end of the decade.

"Such payments are, however, considered a credit risk by rating agencies.

Moody's Investors Service said these payments were 'like fixed-charge

obligations since they need to be made irrespective of whether TNB requires

the IPP to generate electricity'.

"Moody's said TNB was able to recover the cost to the extent electricity was

used but the company's high reserve margin raised risks, in that the

capacity payments had to be made even when there was no demand for power," said the report.

According to the daily, Tenaga's financial problems are expected to mount when the two huge IPP projects - Tanjung Bin and Jimah - come onstream.

The Tanjung Bin power plant, owned by Malakoff Bhd, is expected to be fully

commissioned in August and Jimah, owned by the Negri Sembilan royal family,

by 2009.

"TNB has been navigating power production over the years to bring its reserve

margin down to the 20% to 25% range, but with both Tanjung Bin and Jimah

becoming fully operational and electricity demand growth in the single

digit, its reserve margin would surge towards the 40% range. This would thus

be a drag on TNB instead of being a buffer."

The Star report warned that the positive cashflow that Tenaga could generate from its operations is forecast to shrink over the next few years.

"In its financial year 2005, TNB generated about RM17bil from the sale of

electricity but after paying for fuel, IPP costs, debt payments and capital

expenditure, the company ended up with negative cashflow and had to dip into

borrowings just to fund its normal course of business," it said .

It added that the national utility company would probably be saddled with total borrowings exceeding RM45bil by the end of the decade.