Rating action               

MARC Ratings has affirmed its rating of AAA_IS on TNB Western Energy Berhad’s (TNB Western) outstanding RM3.7 billion sukuk with a stable outlook. 

TNB Western is the funding vehicle for TNB Manjung Five Sdn Bhd, a 100% indirect subsidiary of Tenaga Nasional Berhad (TNB). TNB Manjung Five operates and maintains a 1,000MW ultra-supercritical coal-fired power plant in Manjung, Perak, under a 25-year power purchase agreement (PPA) with TNB. The PPA expires in 2042. 

The sukuk is rated at the same level as TNB’s corporate credit rating of AAA/Stable. The rating equalisation reflects the unconditional and irrevocable rolling guarantee by TNB to cover any shortfall in the transaction’s finance service account (FSA). The rating also considers TNB’s undertaking to maintain full ownership (directly/indirectly) of TNB Manjung Five and TNB Western throughout the sukuk tenure. 

Unplanned outage rate (UOR) as at end-December 2023 was 1.99%, below the 6.0% PPA limit and down from 7.73% as at end-June 2023 as there was no major outage in 2H2023. In 2023, TNB Manjung Five received capacity payments (CP) of RM322.5 million, slightly under budget by 1.29%. It experienced some minor outages that somewhat disrupted operations during the year, resulting in the small budget variance. 

Energy payments (EP) amounted to RM1.5 billion in 2023, a reduction of 10.12% from RM1.7 billion in 2022, largely due to the lower applicable coal prices (ACP) used to calculate the EP. The sharp fall in coal prices seen over 1H2023 resulted in a high negative price differential between TNB Manjung Five’s fuel cost and the ACP. This led to pre-tax loss in 2023. Nevertheless, coal prices have stabilised at around USD140.0/metric tonne (MT) since 4Q2023, alleviating concerns over further loss from negative fuel variance over the near term. 

TNB Manjung Five generated cash flow from operations (CFO) of RM140.6 million in 2023 (2022: RM246.2 million). This is in line with the lower revenue. The company expects to generate CFO of RM208.5 million in 1H2024. This, together with cash of RM147.6 million as at end-January 2024, would be sufficient to cover its upcoming sukuk profit and principal obligations of RM200.9 million due on July 30, 2024. In case of a shortfall, the company can call on the rolling guarantee by TNB; any shortfall in the funds available in the FSA to meet financial obligations will be made good by TNB 28 days prior to their due dates. 

The average projected finance service coverage ratio (FSCR) is 2.14x with a minimum of 1.39x. The cash flow coverage can withstand moderate sensitivity scenarios such as a 10% increase in variable operating expenses, and a 2% reduction in CP and EP.

Downside rating pressure could arise from a material weakening in TNB’s credit profile and/or TNB’s support to TNB Western.