TNB WESTERN ENERGY BERHAD - 2015

MARC has affirmed the rating of AAA_IS 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 vehicle of TNB Manjung Five Sdn Bhd (TNB Manjung Five) to undertake the construction of a 1,000MW ultra-supercritical coal-fired power plant under a 25-year power purchase agreement (PPA) with Tenaga Nasional Berhad (TNB). The power plant sits in close proximity to TNB’s four other existing power plants on a 325 hectare (ha) reclaimed island in Manjung, Perak.

The rating affirmation continues to reflect the equalisation of TNB Western Energy’s rating with its ultimate parent TNB’s AAA/stable rating based on guarantees and commitments from the national utility company. TNB has provided an unconditional and irrevocable project completion support guarantee for the power plant project as well as a rolling guarantee in favour of the sukukholders to cover scheduled semi-annual distributions (principal and profit payments) in the event of plant underperformance. MARC’s approach is further underpinned by TNB’s undertaking to maintain full ownership of TNB Western Energy through its wholly-owned subsidiary, TNB Manjung Five, and by the multiple operational linkages between all three entities.

As at October 31, 2015, the project was 68.85% completed with the accrued project cost at RM3.4 billion. Despite a four-month delay in the tunnelling excavation works by the engineering, procurement and construction (EPC) contractors due to a breakdown of the tunnel boring machine, the overall construction progress was 3.4% ahead of schedule as of end-October 2015. The scheduled commercial operation date (COD) on October 1, 2017 remains unchanged as the EPC contractors are currently expediting works at the affected area, bearing the cost being incurred in connection with the incident. MARC notes that in the event of a failure to achieve scheduled COD, TNB Manjung Five’s liability is adequately covered by provisions for liquidated damages claimable from the EPC contractors. At the same time, 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.

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 RM1.3 billion due in 2033 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.

Based on the base case analysis, the project is expected to generate sufficient cash flow from operations to meet the scheduled financial obligations, except for the final principal repayment amount of RM1.3 billion due in 2033. This is due to the weak liquidity buffer of the projected cash flow given that the ending cash balances (excluding maintenance reserve account) range only between RM0.03 million and RM0.8 million. The minimum and average semi-annual finance service cover ratios (FSCR) of the base case analysis stood at 1.27 times and 1.32 times respectively. MARC’s sensitivity analysis indicates that the project cash flow will be able to withstand moderate plant performance shortfalls with minimum semi-annual FSCRs (with cash balances) above 1.00 time.

MARC notes that TNB Western Energy is exposed to foreign exchange risk, stemming mainly from the remaining outstanding US dollar and Japanese yen portion of the EPC cost of the power plant which stood at US$220.6 million and ¥6.5 billion as at November 13, 2015. At exchange rates of RM4.37 per US dollar and RM0.036 per Japanese yen, TNB Western Energy is projected to experience cash shortfalls in 2016 and 2017 amounting to RM319.8 million, or about 62.5% of the completion support guarantee. In the event the completion support has been fully utilised, MARC is of the view that additional support from TNB would be forthcoming.

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.

Major Rating Factors

Strengths

• Explicit completion and rolling support guarantees provided by ultimate parent, Tenaga Nasional Berhad (TNB);
• Operational proximity with the national utility company;
• Power purchase agreement which allocates demand risk to offtaker; and
• Adequately structured project agreements.

Challenges/Risks

• Sensitivity of engineering, procurement and construction (EPC) cost to foreign exchange movements;
• Potential construction delays and cost overruns;
• Exposure to refinancing risk in 2033; and
• Thin projected finance service cover ratios.