MARC AFFIRMS AAAIS RATING ON TNB NORTHERN ENERGY BERHAD’S RM1.625 BILLION SUKUK

MARC has affirmed its AAA_IS rating on TNB Northern Energy Berhad's (TNB Northern Energy) Islamic securities (sukuk) of RM1.625 billion with a stable outlook. TNB Northern Energy is an indirect wholly-owned subsidiary of Tenaga Nasional Bhd (TNB) and was established to undertake the construction of a 1,071.43-megawatt combined-cycle gas turbine power plant in Seberang Perai Tengah, Penang, under a 21-year power purchase agreement (PPA). 

The affirmed rating and outlook mirror those of TNB Northern Energy’s ultimate parent, TNB, on which MARC currently maintains a senior unsecured rating of AAA with a stable outlook.  The rating equalisation is premised on commitments from TNB in the form of an unconditional and irrevocable project completion support guarantee and a rolling guarantee in favour of the sukukholders. The guarantees address residual project risks not assumed by other project parties. MARC’s assessment is further underpinned by TNB’s undertaking to maintain full ownership of TNB Northern Energy through subsidiary TNB Prai Sdn Bhd (TNB Prai) and by the multiple operational linkages between all three entities. The PPA is between TNB and TNB Prai.

TNB’s project completion support guarantee provides a funding commitment for cost overruns of up to 10% of the project cost (about RM249 million), which MARC deems to be sufficient given that the project is at an advanced completion stage. As of January 31, 2015, the project was 92.3% completed, with the accrued project cost broadly within budget. The overall energy, procurement and construction (EPC) progress, however, was slightly behind schedule mainly due to an interruption in construction works at the turbine building area. Despite the delay, the scheduled commercial operation date (COD) remains unchanged as the EPC contractor has expedited works at the affected area.

Sukukholders are protected against risk of completion delays by TNB’s funding support for scheduled distributions on the sukuk for up to a 12-month period post-scheduled COD of January 1, 2016. TNB Prai’s liability for liquidated damages in the event of failure to achieve COD is also adequately covered by provisions for liquidated damages claimable from the EPC contractor, Samsung C&T (KL) Sdn Bhd. The interfacing works such as construction of natural gas supply pipelines by PETRONAS and electrical interconnection lines by TNB have been completed.

Upon commissioning, the project revenue from the sale of capacity and energy under the PPA is expected to be sufficient to meet the scheduled financial obligations, subject to meeting all the performance requirements as stipulated in the PPA. The base case analysis anticipates minimum and average finance service cover ratios without cash balance of 1.26 times and 1.31 times respectively. Nonetheless, MARC remains concerned on the relatively short operational history of the gas turbine employed in the project to meet the operational capabilities of the project power plant in accordance with the PPA operational standards. The project power plant’s average availability target is set as 94% with an unplanned outage allowance of 4%. The concern is mitigated by the long-term service contracts with reliable project parties, including original equipment manufacturer Siemens AG, gas fuel supplier PETRONAS and operator TNB Repair and Maintenance Sdn Bhd.

MARC’s sensitivity analysis indicates that the project cash flow remains adequate to service the sukuk under mild stress scenarios. Should the project’s cash flow generation be affected due to plant underperformance, the sukuk obligations will be met via an injection of funds from TNB Prai under TNB’s rolling guarantee. The rolling guarantee will commence upon cessation of TNB’s completion support until the final maturity date of the sukuk, covering scheduled semi-annual distributions on the sukuk on a non-accelerable basis.

The stable outlook reflects the outlook on TNB's senior unsecured rating. Any changes in TNB Northern Energy's rating and/or outlook would be primarily driven by a revision of TNB's rating and/or outlook.

Contacts: Noor Izyani Saad, +603-2082 2256/ izyani@marc.com.my; David Lee, +603-2082 2255/ david@marc.com.my.

May 22, 2015