TNB POWER GENERATION SDN BHD - 2022 |
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| Report ID | 605389004707 | Popularity | 666 views 80 downloads | |||||
| Report Date | May 2022 | Product | ||||||
| Company / Issuer | TNB Power Generation Sdn Bhd | Sector | Infrastructure & Utilities - Power | |||||
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| Rationale |
Rating action MARC Ratings has assigned a rating of AAAIS to TNB Power Generation Sdn Bhd’s (TPGSB) proposed sukuk programme of up to RM10.0 billion. The rating carries a stable outlook. Rationale TPGSB is a wholly-owned subsidiary of Tenaga Nasional Berhad (TNB) (AAA/Stable) and was incorporated as part of the TNB group’s transformation plan that includes the separation of its generation divisions in line with the liberalisation of the domestic power industry. In assessing TPGSB’s credit strength, MARC Ratings has considered TNB and its key subsidiaries as a single economic entity given the significant financial and operational linkages. Therefore, as an essential component in TNB’s electricity supply chain, TPGSB’s rating is equalised to TNB’s AAA rating which benefits from a two-notch uplift premised on the assumption of very high likelihood of government support to TNB group. This assumption is based on the importance of energy generation, transmission and distribution in the country. This view is supported by the Ministry of Finance Incorporated’s (MOF Inc) holding of a golden share in TNB, demonstrating the importance of the utility company’s assets to the country. TPGSB commenced operations on October 1, 2020 when the transfer of TNB’s generation assets and liabilities to it was completed. TPGSB’s credit strength reflects its sizeable 59.9% market share in generation capacity in Peninsular Malaysia and predictable earnings arising from long-term power purchase agreements (PPA) between its power plant operators and the offtaker, 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. TPGSB currently owns and manages 15 power plants with 61 generating units, and manages three power plants with 12 units for TNB, two of which are expected to be transferred to TPGSB by end-2022. Coal power plants make up 51.7% of its total plant capacity followed by gas (32.0%), hydro (15.8%) and solar (0.5%) as at end-2021. Further capacity expansion will be in hydro power projects, in line with the government’s objective to increase the capacity contribution from renewable energy (RE). Apart from hydro power, all other RE projects will be undertaken by sister company, TNB Renewables Sdn Bhd (TNB RE). TPGSB is currently developing a 300MW hydro project in Kelantan with commercial operations expected to commence in 2027. We note that the operation risk associated with power plants is mitigated by the strength of TNB Repair and Maintenance Sdn Bhd (TNB REMACO), which provides operations and maintenance (O&M) services to TPGSB’s power plants. Given TPGSB’s geographically and numerically diverse generating units, its power generation is fairly insulated from disruption which therefore mitigates financial risk. Operating profit margin was healthy at 18.2% in 2021. Based on TPGSB’s financial projections, the operating profit margin is expected to decline to 10.3% in 2025 after the expiry of five PPAs with a total capacity of 1,886 MW. The expired PPAs could be extended subject to agreement by all parties to the PPAs and the Energy Commission (EC). Nonetheless, TPGSB could also apply for licences to continue operating the plants as a merchant generator and sell electricity to TNB under the New Enhanced Despatch Arrangement (NEDA+) competitive bidding mechanism. In the event the PPAs are not extended, revenue could be reduced by about 5.6% over four years from the 2021 revenue. However, TPGSB’s capability to service its debt obligations would not be affected from the expiry of the five PPAs given that most of the borrowings are under a project finance structure with debt obligations covered by the respective plants’ cash flow. Debt-to-OPBITDA was moderate at 5.08x in 2021. TPGSB is expected to utilise up to RM5.0 billion from the proposed programme over the next five years to fund the construction of a new 300MW hydro power plant in Kelantan. Assuming issuance of RM5.0 billion of the sukuk for the project, pro forma debt-to-OPBITDA would be 6.28x for 2021. The group’s cash flow from operations (CFO) is projected to range between RM3.1 billion and RM4.0 billion with moderate CFO interest coverage of between 2.09x and 2.80x in the next five years. Rating outlook The stable outlook reflects our expectations that TPGSB will broadly maintain its credit metrics, underpinned by implicit support from parent TNB. Rating trajectory Upside scenario 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 scenario 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. Key strengths • Sizeable market share in domestic energy generation • Earnings predictability of power plants driven by the PPA terms • High likelihood of government support Key challenges/risks • Improving cash flow coverage • Renegotiating terms for expiring PPAs |
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