FW: MARC affirms its AAAIS rating on TNB Northern Energy's outstanding RM1.535 billion sukuk

Posted Date: September 25, 2018

MARC has affirmed its AAA_IS rating on TNB Northern Energy Berhad's (TNB Northern Energy) outstanding Islamic securities (sukuk) of RM1.535 billion with a stable outlook. The rating and outlook are equalised with those of TNB Northern Energy’s ultimate parent, Tenaga Nasional Berhad (TNB) on which MARC currently has a senior unsecured rating of AAA/Stable. The rating equalisation is based on financial commitment from TNB to provide a post-completion rolling guarantee in favour of sukukholders. MARC’s assessment to equalise the rating is further underpinned by TNB’s undertaking to maintain full ownership of TNB Northern Energy and its parent company, TNB Prai Sdn Bhd (TNB Prai) throughout the sukuk tenure as well as TNB’s substantial operational and financial linkages with both TNB Northern Energy and TNB Prai.

TNB Northern Energy is a funding vehicle of TNB Prai, a wholly-owned subsidiary of TNB, to construct a 1,071.43-megawatt (MW) combined-cycle gas turbine power plant in Seberang Perai Tengah, Penang. TNB Prai commenced operations of the gas power plant in February 2016 and has been receiving availability-based revenue under a 21-year power purchase agreement (PPA) with offtaker TNB.

In 2017, TNB Prai received RM184.4 million in capacity payments (CP) which is lower than projected by 7.7%. The reduced CP were due to the increase of the unplanned outage rate (UOR) to 13.6% for one of its two generating units, Unit 20. Concurrently, TNB Prai’s overall average availability target declined to 92% as at end-December 2017 (2016: 96%). The plant’s ability to meet the contractual average availability target (CAAT) of 94% of its contract block for 2016-2018 would hinge on an above average plant performance in 2018. Failure to adhere to the PPA-specified CAAT would result in penalties of RM274,579.62 per block per day to TNB.

While the issues reported in 2016 have been resolved, the plant’s registered heat rates persistently remained higher than the PPA-specified requirements. The higher plant heat rates were attributed to a series of plant restarts upon the completion of planned and unplanned outages. In October 2017, the plant experienced an unplanned outage due to a problem with the compressor of its Siemens SGT5-8000H gas turbine, coupled with a lower actual capacity factor during the year. As a result, TNB Prai failed to achieve a full fuel cost pass-through and the energy payments were 14.8% below projections. MARC notes that based on the long-term maintenance programme contract, the equipment supplier would be liable to restore any affected gas turbine during the next major inspection in January 2019.

For financial year ended August 31, 2017 (FY2017), TNB Prai posted revenue of RM1,214.8 million (FY2016: RM600.5 million) in its first full year of completed plant operations. Its operating profit before interest and tax stood at RM26.0 million on the back of lower expenses and a one-off liquidated damages settlement of RM24.3 million with the engineering, procurement and construction contractor. During the period under review, the plant incurred penalties of RM15.3 million mainly due to unplanned outages and breaches on the tested annual availability capacity. MARC notes with concern the plant’s persistent underperformance attributed to operational factors and will continue to monitor any potential residual technical issues that may surface.

TNB Northern Energy and TNB Prai’s designated account balances and unit trust investments’ combined total of RM158.5 million as at June 30, 2018 is sufficient to cover debt obligations for the next 12 months. The latest base case cash flow projection as at June 2018 showed an upward revision in the operational cash balance to RM14.9 million as at December 31, 2018 based on higher generation forecast. In this scenario, the average base case non-cash finance service cover ratio is 1.31 times with a minimum level of 1.10 times in 2025. Sensitivity analysis demonstrates that the project coverage is most vulnerable in 2025 under scenarios where there are increases in heat rates and prolonged outages.

The plant's underperformance since achieving COD has underlined TNB Prai’s increasing reliance on its parent for both operational and financial support. In this regard, MARC continues to derive comfort from the availability of TNB’s rolling guarantee to cover shortfalls in TNB Northern Energy’s designated accounts up to a minimum amount equivalent to the upcoming principal and profit payments 28 days prior to the payment due date which should provide adequate time for the guarantee to be drawn.

Contacts:
Ati Affira Kholid, +603-2717 2941 / affira@marc.com.my;
David Lee, +603-2717 2955 / david@marc.com.my