MARC has affirmed the rating of AAAIS on TNB Western Energy Berhad's (TNB Western Energy) Islamic Sukuk of up to RM4.0 billion with a stable outlook.

TNB Western Energy is the funding conduit of TNB Manjung Five Sdn Bhd (TNB Manjung Five), the project company for the construction of the 1,000-megawatt ultra-supercritical coal-fired power plant under a 25-year power purchase agreement (PPA) with Tenaga Nasional Berhad (TNB) in Manjung, Perak.

The affirmed rating and outlook are equalised to TNB's ratings of AAA/stable from MARC based on the unconditional and irrevocable project completion support guarantee and a rolling guarantee in favour of the sukukholders provided by TNB. MARC's assessment is further underpinned by TNB's undertaking to maintain full ownership of TNB Western Energy through TNB Manjung Five and by the multiple operational linkages between all three entities.

During the review period, the project's cost was revised upwards to about RM5,470 million from RM5,114 million due to currency fluctuations, an increase in net interest during construction, staff costs and higher-than-expected fuel costs during the commissioning phase. The increase of RM356 million is expected to be covered by TNB's completion support guarantee (10% of project costs or RM511.4 million). The company has hedged all foreign-denominated contract payments until April 2017, leaving only an amount of about RM86.8 million in unhedged contract payments. MARC does not expect the total project cost to be revised further given that the project is at the final stage of construction. TNB Western Energy has also budgeted a construction contingency fund of RM100.5 million in the revised project cost.

As of October 31, 2016, the project was 97.9% completed with an accrued project cost of RM4.82 billion against the projected amount of RM4.8 billion. Following the successful back-energisation exercise on June 30, 2016, the power plant remains on course to meet its scheduled commercial operation date (COD) on October 1, 2017. In the event of a failure to achieve the scheduled COD, TNB Manjung Five's liability is adequately covered by provisions for liquidated damages claimable from the engineering, procurement and construction contractors. At the same time, sukukholders are protected against the risk of completion delay by TNB's funding support for scheduled distributions on the sukuk for up to a 12-month period post the scheduled COD.

Upon commissioning, TNB Manjung Five is expected to generate predictable cash flow streams provided by the PPA's availability-based capacity payments as well as the pass-through of fuel and variable expenses to TNB. The project's exposure to operations and maintenance (O&M) as well as fuel supply risks are deemed low due to the O&M operator and fuel supplier's track record, experience and their strong linkages with TNB. Although the bullet repayment of RM1,315 million due in 2034 will expose TNB Western Energy to significant refinancing risk, MARC draws comfort from the availability of a rolling guarantee from TNB and working capital facilities of up to RM200 million to address any short-term liquidity risks.

Upon taking into account the increased project cost, the company's revised base case (assuming no dividend payment) minimum and average finance service cover ratios (FSCR) without cash balance have further declined to 1.27 times (x) and 1.33x respectively. MARC's stressed scenarios reveal that TNB Western Energy would breach the 1.0x FSCR in the event of further cost overruns and is susceptible to potential FSCR breaches if the plant does not meet the required heat rates and experiences an unplanned outage rate of 8%. Should the project's cash flow generation be affected due to plant underperformance, any shortfall of sukuk obligations will be met via an injection of funds under TNB's rolling guarantee terms. The rolling guarantee will commence upon cessation of TNB's completion support and will be in force until the final maturity date of the sukuk, covering scheduled semi-annual distributions on the sukuk on a non-accelerable basis.

In addition to the completion support and rolling guarantee, TNB Western Energy's shareholding covenant and TNB Manjung Five's operational proximity to TNB represent drivers of parental implicit support. This is crucial in ensuring additional support is forthcoming from TNB in the event the completion support has been exhausted.

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

Contacts: Adib Asilah, +603-2082 2243/ asilah@marc.com.my: Ng Chun Kean, +603-2082 2230/ chunkean@marc.com,my: David Lee, +603-2082 2255/ david@marc.com.my.