MARC Ratings has affirmed its AAA_IS rating on TNB Northern Energy Berhad’s outstanding sukuk of RM1.32 billion with a stable outlook. 

TNB Northern is the funding vehicle for TNB Prai Sdn Bhd, a 100% indirectly-owned subsidiary of Tenaga Nasional Berhad (TNB). TNB Prai operates a 1,071.43MW combined-cycle gas turbine (CCGT) power plant (comprising two 535.715MW units) in Seberang Perai Tengah, Penang under a 21-year power purchase agreement (PPA) with offtaker TNB. The plant achieved commercial operation date (COD) in February 2016.

The rating and outlook are equalised to TNB’s corporate credit rating of AAA/stable, on the strength of the commitment TNB has extended through an unconditional and irrevocable rolling guarantee to fund shortfalls in the finance service account, as well as its undertaking to maintain full ownership in TNB Northern through TNB Prai. The operational and financial linkages between the entities underpin the rating. 

The plant’s unplanned outage rate (UOR) continued to improve during 2H2021. Of its two generating units, Unit 20’s UOR has returned to within PPA limits of below 4%, standing at 2.19% as at end-December 2021 (end-May 2021: 4.19%). Unit 10’s UOR remained within limits as well, standing at 2.17% as at end-December 2021. As a result, capacity payments (CP) for FY2021 increased to RM200.8 million (2020: RM194.4 million), close to its budgeted amount. Energy payments (EP), however, decreased by 7.2% to RM1,176.4 million in 2021 (2020: RM1,267.8 million) due to lower gas prices. Accordingly, TNB Prai posted lower revenue of RM1,382.5 million in FY2021 (FY2020: RM1,469.1 million). 

While TNB Prai was not able to fully pass through its fuel cost due to heat rates continuing to exceed PPA limits, the variance narrowed to RM16.1 million compared to RM21.6 million in 2020. Coupled with higher CP and lower finance costs, pre-tax profit improved to RM45.4 million (FY2020: RM33.4 million). 

Under base case cash flow projections, TNB Prai’s minimum and average finance service cover ratios (FSCR) with cash declined to negative 0.57x and 0.92x (2021: 0.27x and 1.76x), following substantial upward revisions in capex requirements of RM141.9 million for additional inspection and maintenance costs. 

Designated account balances of RM171.1 million as at March 31, 2022 are more than sufficient to meet the upcoming semi-annual sukuk profit and principal obligations of RM59.1 million in May 2022. However, in the longer term, shortfalls in cash for repayments from 2027 onwards are expected to be covered by shareholder advances under the rolling guarantee. 

Downward rating pressure would arise in the event of significant deterioration in TNB’s credit profile and/or adverse changes to the level of support to TNB Northern.