MARC
has affirmed its AAAIS rating on TNB Northern Energy
Berhad's (TNB Northern Energy) Islamic securities (sukuk) of RM1.625 billion
with a stable outlook. TNB Northern Energy was established to finance
and develop a 1,071.43-megawatt combined-cycle gas turbine power plant in Seberang
Perai Tengah, Penang, under a 21-year power purchase agreement (PPA) with
offtaker Tenaga Nasional Berhad (TNB). TNB Northern Energy is 100% owned by TNB
Prai Sdn Bhd (TNB Prai) which is in turn a fully owned subsidiary of TNB.
The
rating and outlook are equalised with those of TNB Northern Energy’s ultimate
parent TNB, on which MARC currently has a senior unsecured rating of
AAA/Stable. The rating equalisation is based on TNB’s commitment in the form of
an unconditional and irrevocable project completion support guarantee and
post-completion rolling guarantee in favour of sukukholders. MARC’s assessment
is further underpinned by TNB’s undertaking to maintain full ownership of TNB
Northern Energy in addition to the operational proximity and financial linkages
between the two entities.
The
power plant project achieved full commercial operation date (COD) on February
20, 2016, following a 50-day delay from the original scheduled COD. The delay,
which was attributed to design issues and defects encountered during the
commissioning phase, has resulted in liquidated damages (LD) of RM32.1 million
payable to TNB. MARC notes that TNB Northern Energy will claim a LD payment of
RM59.6 million from the engineering, procurement and construction (EPC)
contractor, Samsung C&T (KL) Sdn Bhd (Samsung). The delay, coupled with the
weakening ringgit, has led to a 3.9% increase above the original project cost
budget to RM2,587.3 million at completion. The increase, however, remains well
within the project sponsor’s completion support guarantee of 10% or RM249
million.
The
plant’s operations and maintenance (O&M) duties are carried out by related
entity TNB Repair & Maintenance Sdn Bhd (TNB Remaco) under a 21-year
O&M agreement. The rating agency notes that the LD provision under the
O&M agreement is not sufficient to recover any revenue losses given that
TNB Remaco is only liable for up to 30% in capacity payment reductions and
non-reimbursable fuel cost in the event of breaches in the contracted average
availability target, net output capacity and net heat rate. Nonetheless,
O&M risk is mitigated through the availability of plant warranty and
long-term turbine maintenance support provided by Samsung and Siemen AG
respectively. With regard to fuel supply risk, the long-term gas supply
agreement with Petroliam Nasional Berhad addresses this concern.
The
project revenue in the form of availability capacity and energy payments
subject to meeting performance standards under the PPA provides sufficient
coverage to TNB Northern Energy’s fairly flat debt servicing profile. The
company is expected to achieve an average finance service cover ratio (FSCR)
without cash balances of 1.31 times during the sukuk tenure. MARC views TNB
Northern Energy’s finance service ability as adequate even after taking into
account the COD delay which has led the projected cash balance being revised
downward by RM4 million to RM33 million as at December 31, 2016. TNB Northern
Energy’s designated account balances of RM118 million as at April 30, 2016 is well
above the finance service obligations of RM70 million for 2016.
MARC’s
sensitivity analysis reveals that the project coverage is only able to
withstand mild stresses due to the absence of cash build-up. TNB Northern
Energy is expected to return about RM834 million of capital to its shareholders
during the sukuk tenure subject to meeting a distribution finance service cover
ratio of 1.50 times. The rating agency expects the project sponsor’s rolling
guarantee to act as a reliable liquidity source during periods of
weaker-than-projected cash flows.
The
stable outlook mirrors 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: Ng
Chun Kean, +603-2082 2230/ chunkean@marc.com.my;
David Lee, +603-2082 2255/ david@marc.com.my.
June 29, 2016
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