CREDIT ANALYSIS REPORT

TNB NORTHERN ENERGY BERHAD - 2020

Report ID 605258 Popularity 497 views 25 downloads 
Report Date Sep 2020 Product  
Company / Issuer TNB Northern Energy Bhd Sector Infrastructure & Utilities - Power
Price (RM)
Normal: RM500.00        
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Rationale
MARC has affirmed its AAAIS rating on TNB Northern Energy Berhad's (TNB Northern) outstanding Islamic securities (sukuk) of RM1.415 billion. The rating carries a stable outlook.

TNB Northern is a funding vehicle of TNB Prai Sdn Bhd (TNB Prai) which was established to design, construct, own, operate and maintain the 1,071.43-MW combined-cycle gas turbine (CCGT) power plant in Seberang Perai Tengah, Penang under a 21-year power purchase agreement (PPA) with offtaker Tenaga Nasional Berhad (TNB). TNB Prai is wholly owned by TNB.

The rating is equalised to TNB’s corporate credit rating of AAA/stable, primarily based on its financial commitment to provide an unconditional and irrevocable rolling guarantee to fund shortfalls in the finance service account (FSA) and an undertaking to maintain full ownership in TNB Northern and TNB Prai. The rating equalisation is also underpinned by the substantial operational and financial linkages among these entities. Meanwhile, TNB’s corporate credit rating mainly reflects its monopolistic position in electricity transmission and distribution assets in Peninsular Malaysia and Sabah, its substantial strength in electricity generation and its strong financial standing. 

In 2019, TNB Prai’s unplanned outage rate (UOR) continued to improve with Unit 10, one of the two generating blocks, recording a rolling average UOR of 4.37% in 2019 (2018: 7.72%) and Unit 20 recording 4.15% (2018: 4.21%). This led to higher capacity payments (CP) of RM199.2 million (2018: RM190.7 million). However, the CP were 0.6% lower compared to the budget as the UOR remained higher than the PPA-stipulated unplanned outage limit (UOL) of 4.0%, this was mainly due to an extension to the planned major inspection outage, although no major technical issues were experienced by the plant during the review period.

TNB Prai received energy payments (EP) of RM1,296.7 million, 9.4% lower than budgeted due to lower dispatch during the year as well as the plant heat rate exceeding PPA requirements. The higher heat rate led to TNB Prai being unable to fully pass through fuel costs. Since achieving commercial operation date (COD) in February 2016, the plant’s heat rate has persistently exceeded PPA limits chiefly due to the lack of margin between actual and PPA heat rate values at COD. In order to mitigate the heat rate issue, TNB Prai has upgraded its long-term maintenance programme (LTMP) and also has a turnaround programme in place. Notwithstanding these mitigation measures, heat rate degradation over time would affect the plant’s ability to meet the PPA heat rate requirements. 

For 2019, TNB Prai reported pre-tax losses of RM1,755.6 million due to significant provisions for impairments, on account of the increasing likelihood of the plant not being able to achieve the level of efficiency as stated in the PPA. Cash flow from operations (CFO) increased to RM115.4 million compared to RM53.0 million in 2018 due to positive working capital changes to payables. Based on cash flow projections, TNB Prai’s minimum and average finance service cover ratios (FSCR) with cash currently stand at 0.52x and 0.93x. The FSCR is projected to fall below 1.00x from 2022; any liquidity shortfalls are expected to be covered by shareholder advances through the rolling guarantee. There are sufficient funds of RM98.5 million in the designated accounts as at end-May 2020 to meet the upcoming semi-annual profit and principal sukuk obligations of RM66.0 million in November 2020.

Major Rating Factors

Strengths
  • Rolling guarantee support from ultimate parent and offtaker TNB; and
  • Operational and financial linkages with TNB.
Challenge/Risk
  • Achieving the power purchase agreement’s minimum operational requirement.


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