TNB Northern Energy Bhd - 2014

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. The rating and outlook are equalised with those of the project sponsor, Tenaga Nasional Berhad (TNB), which has provided credit substitution in the form of explicit project completion support and rolling guarantees in favour of the sukukholders. MARC maintains TNB’s issuer rating at AAA with a stable outlook based on the national utility company’s dominant market share, sound operational track record, prudent fiscal management and satisfactory debt service coverage level, in addition to the high likelihood of government support.

TNB Northern Energy is a wholly-owned funding vehicle of TNB Prai Sdn Bhd (TNB Prai) for the construction of a 1,071.43-megawatt combined-cycle gas turbine power plant in Seberang Perai Tengah, Pulau Pinang (project power plant). TNB Prai is in turn wholly owned by TNB.

The project completion support and rolling guarantees provided by TNB substantially mitigate project risks relating to the development and operations of the project power plant under a 21-year power purchase agreement (PPA) between TNB Prai and TNB. MARC views the project sponsor’s undertaking as a reliable liquidity support mechanism which would enable TNB Northern Energy to draw funds in advance to fully meet any upcoming principal and profit payments in the event of any funding shortfalls post-scheduled commercial operation date (COD) on January 1, 2016. Sukukholders also benefit from TNB’s guarantee to provide funding of up to 10% of the project cost or approximately RM249 million to cover cost overruns outside the engineering, procurement and construction (EPC) contractor’s scope of work.

At the project level, project completion risk is mitigated by the strong track record of and back-to-back performance guarantees provided by the EPC contractor, Samsung C&T (KL) Sdn Bhd (formerly known as Samsung Engineering & Construction (M) Sdn Bhd). The long-term service contracts with reliable project parties, including original equipment manufacturer Siemens AG, gas fuel supplier Petroliam Nasional Berhad (PETRONAS) and operator TNB Repair and Maintenance Sdn Bhd, serve to reduce operational and performance-related risks upon COD. MARC also draws comfort from the sufficiency of project revenues from the sale of capacity and energy to a creditworthy offtaker TNB to meet finance service requirements. 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, as highlighted when the rating was first assigned in May 2013, MARC remains concerned about the operational capabilities of the project power plant in accordance with PPA operational standards – 94% minimum availability with an unplanned outage allowance of 4% – given the relatively new variant of gas turbine that will be used. Partly mitigating this concern is the anticipated strong operational support from TNB, stemming from its commitment to maintain full ownership of TNB Prai and TNB Northern Energy throughout the sukuk tenure and the multiple financial and operational linkages between the three entities. In addition, MARC believes that TNB’s rolling guarantee would help manage the issuer’s liquidity profile at the AAA rating level through timely cash injections in the event of deterioration of operating cash flow generation due to plant underperformance.

The project power plant is 36.7% completed as of end-January 2014, slightly ahead of scheduled completion of 35.9% with project expenditure broadly within budget. The construction progress of the natural gas supply pipelines and the electrical interconnection lines by PETRONAS and TNB respectively were also reported to be on schedule. According to the PPA, the project power plant’s initial operation date is expected on July 1, 2015, which provides a period of about six months for TNB Prai to complete the commissioning and start-up process.

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