TNB NORTHERN ENERGY BERHAD - 2017

MARC has affirmed its AAA_IS rating on TNB Northern Energy Berhad's (TNB Northern Energy) outstanding Islamic securities (sukuk) of RM1.595 billion with a stable outlook.

TNB Northern Energy is a funding vehicle of its parent TNB Prai Sdn Bhd (TNB Prai), a wholly-owned subsidiary of Tenaga Nasional Berhad (TNB), for the construction of a 1,071.43-megawatt (MW) combined-cycle gas turbine (CCGT) power plant in Seberang Perai Tengah, Penang. TNB Prai has been receiving availability-based revenue under a 21-year power purchase agreement (PPA) with offtaker TNB since February 2016 when the gas power plant commenced operations.

The affirmed rating on TNB Northern Energy is equalised to its ultimate parent, TNB, on which MARC currently has a senior unsecured rating of AAA/Stable. The rating equalisation is based on commitment from TNB to provide 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 as well as TNB’s substantial operational and financial linkages with both TNB Northern Energy and TNB Prai.

During the period under review, the plant encountered unplanned outages in May 2016 and September 2016 due to pipe cracks and a tube leak of its heat recovery steam generator respectively. The outages during both months led to lower average monthly availability target (AT) of 85.4% up to end-January 2017. Any further occurrence of plant unavailability would pose challenges to TNB Prai in meeting its contractual average availability target (CAAT) of 94%, which is determined at end-2018. If the CAAT is not met at that date, it would result in penalties payable to TNB.

TNB Prai received total capacity revenue of RM175.2 million between February 2016 and January 2017, which was 7.8% below the budgeted amount due to the breach in unscheduled outage limit (UOL) of 4%. As at January 31, 2017, the plant’s 12-month average rolling unplanned outage rate (UOR) of 9.2% and 11.2% for Unit 10 and Unit 20 respectively remained above the prescribed limit. At the same time, the plant also did not manage a full fuel cost pass-through as the heat rates were higher than the PPA requirements. The higher plant heat rates were largely contributed by the outages and part load heat rate variance. The operations and maintenance (O&M) operator, TNB Repair & Maintenance Sdn Bhd (TNB Remaco) has since undertaken remedial measures to address the plant heat rate issues during the recent warranty and combustion inspection in July 2017. MARC will continue to monitor the heat rate performance to ascertain if the plant operates within PPA-specified requirements.

The plant’s underperformance led to TNB Prai posting revenue of RM600.5 million for the financial year ended August 31, 2016 (FY2016). The plant incurred monetary losses amounting to RM15.1 million due to major forced outages for the period between February 2016 and January 2017 with RM3.1 million claimable from TNB Remaco. TNB Prai is not expected to incur additional costs in view of the warranty for defects provided by its engineering, procurement and construction contractor, Samsung C&T (KL) Sdn Bhd (Samsung C&T). However, the liquidated damages payable to TNB Northern Energy of RM59.6 million due from Samsung C&T following the delay of the commercial operation date (COD) in 2016 are still under negotiations.

TNB Northern Energy and TNB Prai’s designated account balances and unit trust investments’ combined total of RM133 million as at May 31, 2017 is sufficient to cover the sukuk repayment of RM129.1 million in 2017. However, MARC remains concerned on any prolonged outages going forward given that the project base case coverage without cash averages at 1.26 times. MARC’s sensitivity analysis estimates that project coverage is relatively vulnerable in 2017 and 2018 as the project may experience a cash deficit should the plant encounter further reduction in its capacity revenue and energy payments.

Projected cash balance under the updated cash flow projection as at December 31, 2017 has been revised downward by RM21 million to RM1.8 million after considering the assumptions of lower CAAT and the higher-than-expected heat rates. While the plant has managed to demonstrate some operational stability since late 2016, the revision in the cash flow assumptions seems to suggest that potential residual technical issues may surface over the next 18 months. In this regard, MARC continues to derive comfort from the availability of the rolling guarantee which ensures that TNB Northern Energy’s shareholders will inject funds into the company should the need arise.

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.

Major Rating Factors

Strengths

• Explicit support from and operational proximity to ultimate parent TNB; and
• Financial capacity of ultimate parent to provide support.

Challenges/Risks

• Limited operational track record of project’s gas turbine model;
• Moderate debt protection measures for the sukuk; and
• Sensitivity of maintenance expenses to foreign exchange rate movements.