MARC has affirmed its AAA_IS rating on TNB Western Energy Berhad’s sukuk of up to RM4.0 billion with a stable outlook. TNB Western Energy is the funding vehicle of TNB Manjung Five Sdn Bhd, a wholly-owned subsidiary of Tenaga Nasional Berhad (TNB) and which was awarded a 25-year power purchase agreement (PPA) in 2013.

The rating and outlook of TNB Western Energy are equalised with TNB’s corporate credit rating of AAA/stable on the strength of TNB’s explicit parental support in the form of a rolling guarantee to fund shortfalls in the finance service account (FSA) for the tenure of the sukuk. The assessment is underpinned by TNB’s undertaking to maintain full ownership of TNB Western Energy through TNB Manjung Five and TNB’s position as the project sponsor and sole offtaker. The rating action is also premised on the assurance that a reorganisation being undertaken by TNB will have no material impact on the contractual obligations to TNB Western Energy.

TNB Manjung Five owns a 1000-MW ultra-supercritical coal-fired power plant that has been in operation since September 28, 2017. TNB Manjung Five received capacity payments (CP) of RM299.6 million and RM148.6 million in 2018 and 1H2019 in line with its budget. However, the plant did not manage a full fuel cost pass-through during the period as actual heat rates exceeded PPA requirements. This was caused by several technical issues with plant machinery and equipment that have been addressed in August 2019.

Any costs incurred will be adequately covered by the existing latent defect warranty, provided by the engineering, procurement and construction (EPC) contractors, which will remain valid until end-September 2023. While fuel costs were not fully recovered by the energy payments (EP) as a result of excessive heat, the EP of RM1,014.4 million received in 2018 was 4.54% higher than the budget on higher variable operating payment due to an increase in electricity demand. For 1H2019, EP of RM595.8 million received was 4.83% below the budget, mainly due to lower electricity demand.

TNB Manjung Five posted total revenue of RM1,014.4 million and finance lease income of RM374.5 million in 2018. Pre-tax profit stood at RM138.3 million with a net profit margin of 10.25%. Adjusted cash flow from operations (CFO) stood at RM312.4 million, corresponding to a moderate CFO interest coverage ratio of 1.52x. The company did not incur any capital expenditure or pay any dividends in 2018.

Under the latest base case projections, the minimum and average pre-distribution finance service cover ratios (FSCR) are 0.67x and 1.11x during the sukuk tenure. The FSCR would fall below 1.0x in 2023, during which TNB Manjung Five’s projected CFO of RM201.5 million would not be sufficient to cover the sukuk repayment amount of RM302.6 million due in 2024. In this event, and/or if there is a deterioration in financial capacity stemming from major issues affecting the power plant’s performance, MARC expects TNB’s rolling guarantee to kick in and meet sukuk repayments as scheduled. The guarantee covers all semi-annual profit and principal distributions and also mitigates any potential refinancing risk arising from the final principal repayment sum of RM1.3 billion due in 2034.

Contacts:
Chia Kah Yie, +603-2717 2961/ kahyie@marc.com.my;
Sharidan Salleh, +603-2717 2954/ sharidan@marc.com.my