Rating action                  

MARC Ratings has affirmed its AAA_IS rating on TNB Northern Energy Berhad’s (TNB Northern) outstanding RM1.15 billion sukuk with a stable outlook. 

TNB Northern is the funding vehicle for TNB Prai Sdn Bhd (TNB Prai), which operates a 1,071.43-megawatt (MW) combined-cycle gas turbine (CCGT) power plant (comprising two power generation units — Unit 10 and Unit 20 — with an installed capacity of 535.715MW each) in Seberang Perai Tengah, Penang. TNB Prai is 100%-owned by TNB Power Generation Sdn Bhd (TPGSB), which in turn is wholly-owned by Tenaga Nasional Berhad (TNB). TNB Prai has a 21-year power purchase agreement (PPA) with TNB until February 2037.

 

TNB Northern’s rating is equalised with the corporate credit rating of TNB (AAA/Stable) on the basis of the unconditional and irrevocable rolling guarantee provided by TNB to cover any shortfalls in the former’s revenue account and its undertaking to maintain full ownership in TNB Northern through TNB Prai. The guarantee, along with the ownership undertaking, ensures strong legal linkages between TNB Northern and TNB. The rating alignment also reflects the high integration between the subsidiaries and the ultimate parent. 

Both Unit 10 and Unit 20 had no major unplanned outages in 2023. TNB Prai received approximately RM201.2 million of capacity payments (CP) in 2023 — just 0.3% shy of budget — due to minor outages. It also received RM1,445.7 million in energy payments (EP). TNB Prai was, nevertheless, unable to pass through its fuel costs to TNB. MARC Ratings notes that TNB Prai’s heat rate has consistently exceeded the PPA fuel cost recovery threshold primarily due to the lack of buffer between the plant’s heat rate and the PPA requirement, coupled with the normal heat rate degradation. In 2023, the heat rate performance of Units 10 and 20 on average was 1.53% above the PPA target (actual of 6,986.53 kJ/kWh versus target of 6,881.55 kJ/kWh).  

On February 7, 2024, the power plant experienced a major outage when Unit 10’s damaged generator rotor  caused it to be unexpectedly taken out of service. The outage caused Unit 10’s unplanned outage rate (UOR) to spike to 33.9% in June 2024 from 0.6% in January 2024 and a loss in CP of around RM30.3 million. While a root cause analysis is currently underway, the rotor issue has since been rectified and Unit 10 has recommenced operations since June 7, 2024. TNB Prai estimates the cost of repairs at approximately RM80 million and expects to recover RM60 million through insurance.

Meanwhile, Unit 20’s operating performance has been healthy, with no major issues reported in the last three years. Its UOR was largely within the PPA requirement.

With its cash flow disrupted by the outage, TNB Northern’s principal repayment and profit payment of RM61.2 million on May 29, 2024, were met by a capital injection of RM70 million received on April 29, 2024. Liquidity in the form of cash stood at RM39.2 million as at end-May 2024. TNB Prai expects further financial support of RM130 million to come from TPGSB in 2H2024 that would cover the repair costs in the interim and support upcoming sukuk obligations of RM61.2 million on November 29, 2024. MARC Ratings views the guarantee by TNB as the strongest form of parental support and expects extraordinary backing to be forthcoming from the parents, if needed. TNB Prai’s base case average finance service cover ratio (FSCR) is projected at 1.14x, with a minimum of below 1.0x in certain years.   

Rating pressure would arise in the event of significant deterioration in TNB’s credit profile and/or weakness in the level of support to TNB Northern.