MARC Ratings has affirmed its rating of AAA_IS  on TNB Power Generation Sdn Bhd’s (TPGSB) Sukuk Wakalah programme of up to RM10.0 billion with a stable outlook. As at end-November 2022, the outstanding amount under the programme stood at RM1.5 billion.

MARC Ratings has affirmed its AAA_IS rating on TNB Power Generation Sdn Bhd’s (TPGSB) Sukuk Wakalah programme of up to RM10.0 billion with a stable outlook. 

Wholly owned by Tenaga Nasional Berhad (TNB), TPGSB owns and manages 14 power plants, and manages three power plants for TNB with total capacity of 15,755MW as at end-September 2022. TPGSB’s credit strength primarily reflects its sizeable 55.4% generation market share in Peninsular Malaysia and its predictable earnings arising from long-term power purchase agreements (PPA) between its power plant operators and TNB. Most of the PPAs provide availability-based payments and allow for fuel cost pass-through subject to the power plants meeting the PPA’s operational performance requirements. 

Based on significant financial and operational linkages between the entities, MARC Ratings has equalised TPGSB’s rating to TNB’s AAA/stable rating. TNB’s rating incorporates a two-notch uplift premised on the rating agency’s assessment of a very high likelihood of government support to the TNB group, given its strategic role in energy generation, transmission, and distribution for the Malaysian economy.

For 1H2022, the TPGSB group recorded higher revenue of RM10.5 billion (1H2021: RM7.6 billion), mainly on higher energy payments (EP). Pre-tax profit rose by 12.0% y-o-y to RM925.5 million. Debt-to-OPBITDA stood at 5.31x as at end-June 2022. Total borrowings rose to RM22.8 billion from RM21.6 billion following a drawdown of RM1.5 billion under the rated sukuk programme. The proceeds were used for the construction of the 300MW Nenggiri hydro power plant in Kelantan which will cost RM5.0 billion. Over the next three years, borrowings will gradually rise to RM24.6 billion for further funding of the Nenggiri hydro power plant and for the life extension programme for Sungai Perak. TPGSB’s capability to service its financial obligation remains more than sufficient; apart from the funding cost for both hydro plants, its borrowings are under a project finance structure where the financial obligations are covered by the respective plants’ cash flows.

The stable outlook reflects our expectations that TPGSB will broadly maintain its credit metrics, underpinned by implicit support from parent TNB. 

Any upside to TPGSB’s standalone profile will depend on material improvement in its overall credit metrics, in particular its operating margin and debt-to-OPBITDA ratio.

Downside rating pressure could occur in the event of any change in TPGSB’s strategic role as the principal energy provider and/or if there is a substantial weakening in cash flow or liquidity position.