TNB WESTERN ENERGY BERHAD - 2018

MARC has affirmed its AAA_IS rating on TNB Western Energy Berhad’s Sukuk of up to RM4.0 billion with a stable outlook.

TNB Western Energy is the funding vehicle of parent TNB Manjung Five Sdn Bhd, a wholly-owned subsidiary of TNB. The rating and outlook are equalised with Tenaga Nasional Berhad’s (TNB) corporate credit rating of AAA/stable on the basis of the rolling guarantee and commitment from the national utility company. TNB has given an undertaking to maintain full ownership of TNB Western Energy through TNB Manjung Five which has operational proximity to the project sponsor and offtaker TNB.

TNB Manjung Five was awarded a 25-year power purchase agreement (PPA) by TNB on August 16, 2013 to design, construct, own, operate and manage a 1,000-MW ultra-supercritical coal-fired power plant. Sited on a reclaimed island at Manjung, Perak, the power plant commenced operations on September 28, 2017.

TNB Manjung Five has contracted sister company TNB Repair & Maintenance Sdn Bhd (TNB Remaco) to operate and maintain the power plant under a 25-year operation and maintenance agreement (OMA). MARC views the O&M provider as experienced and competent. While the liabilities of TNB Remaco under the OMA are capped at a level which exposes TNB Manjung Five to the risk of revenue losses, MARC believes that the O&M provider will be sufficiently motivated to resolve issues promptly. Meanwhile, fuel supply risk is adequately addressed through a long-term coal supply and transportation agreement with TNB Fuel Services Sdn Bhd. The risk is further mitigated by the close proximity between TNB Manjung Five and neighbouring power plants, which allows the plants to share coal yard and jetty facilities.

During the period under review, TNB Manjung Five received capacity revenue of RM78.0 million and RM148.6 million in 2017 and 1H2018, which were in line with the budget as the plant registered an unplanned outage rate below the PPA-specified unplanned outage limit. However, the plant did not manage a full fuel cost pass-through as the heat rates were higher than the PPA requirements. This led to 10.9% lower receipts in energy payments (EP) from the budgeted amount in 2017. TNB Remaco has taken remedial measures to address these issues, resulting in an improved heat rate performance in 1H2018. MARC will continue to monitor the heat rate performance to evaluate the impact EP losses would have on TNB Manjung Five’s financial profile.

Under the latest base case projections, the project is forecast to have minimum and average pre-distribution finance service cover ratios (FSCR) with cash of 0.76x and 1.21x during the sukuk tenure. MARC notes that the projected FSCRs are lower than other MARC-rated independent power producers, signalling lower resilience to operational issues. Based on MARC’s sensitivity analysis, the project’s cash flow coverage is susceptible to reduction in CP receipts and heat rate underperformances.

MARC expects TNB’s rolling guarantee to adequately address any deterioration in the financial capacities of TNB Western Energy and TNB Manjung Five in meeting the sukuk repayments in the event of any major or prolonged issue affecting the power plant. The rolling guarantee covers scheduled semi-annual distributions on the sukuk on a non-accelerable basis. Any changes in TNB Western Energy’s rating and/or outlook would be primarily driven by a revision to TNB’s rating and/or outlook.

Major Rating Factors

Strengths

• Rolling support guarantees provided by ultimate parent Tenaga Nasional Berhad;
• Power purchase agreement that allocates demand risk to offtaker; and
• Adequately structured project agreements

Challenges/Risks

• Refinancing risk in 2033; and
• Thin projected finance service cover ratios