MARC affirms rating on TNB Western Energy's RM4b sukuk

According to the Energy Commission (EC), electricity demand growth has been declining due to structural changes in the economy and increases in the electricity tariff.

KUALA LUMPUR: Malaysian Rating Corporation Bhd (MARC) has affirmed its AAAIS rating on TNB Western Energy Bhd’s Sukuk of up to RM4bil with a stable outlook. 
 
TNB Western Energy is the funding vehicle of parent TNB Manjung Five Sdn Bhd, a unit of Tenaga Nasional Bhd (TNB), the rating agency said in a statement on Monday. 

The rating and outlook are equalised with Tenaga Nasional Bhd’s (TNB) corporate credit rating of AAA/stable on the basis of the rolling guarantee and commitment from the national utility company. 

TNB has given an undertaking to maintain full ownership of TNB Western Energy through TNB Manjung Five which has operational proximity to the project sponsor and offtaker TNB. 
 
To recap, TNB Manjung Five was awarded a 25-year power purchase agreement (PPA) by TNB on Aug 16, 2013 to design, construct, own, operate and manage a 1,000-MW ultra-supercritical coal-fired power plant. 

The power plant was built on a reclaimed island at Manjung, Perak and it started operations on Sept 28, 2017.

TNB Manjung Five contracted TNB Repair & Maintenance Sdn Bhd (TNB Remaco) to operate and maintain the power plant under a 25-year operation and maintenance agreement (OMA). 

“MARC views the O&M provider as experienced and competent. While the liabilities of TNB Remaco under the OMA are capped at a level which exposes TNB Manjung Five to the risk of revenue losses, MARC believes that the O&M provider will be sufficiently motivated to resolve issues promptly. 

“Meanwhile, fuel supply risk is adequately addressed through a long-term coal supply and transportation agreement with TNB Fuel Services Sdn Bhd. The risk is further mitigated by the close proximity between TNB Manjung Five and neighbouring power plants, which allows the plants to share coal yard and jetty facilities,” it said.  
 
During the period under review, TNB Manjung Five received capacity revenue of RM78mil in 2017  and RM148.6mil in the 1H2018, which were in line with the budget as the plant registered an unplanned outage rate below the PPA-specified unplanned outage limit. 

However, the plant did not manage a full fuel cost pass-through as the heat rates were higher than the PPA requirements. This led to 10.9% lower receipts in energy payments (EP) from the budgeted amount in 2017. 

“TNB Remaco has taken remedial measures to address these issues, resulting in an improved heat rate performance in 1H2018. MARC will continue to monitor the heat rate performance to evaluate the impact EP losses would have on TNB Manjung Five’s financial profile,” it said.
 
Under the latest base case projections, the project is forecast to have minimum and average pre-distribution finance service cover ratios (FSCR) with cash of 0.76 times and 1.21 times during the sukuk tenure. 

MARC notes that the projected FSCRs are lower than other MARC-rated independent power producers, signalling lower resilience to operational issues. 
Based on MARC’s sensitivity analysis, the project’s cash flow coverage is susceptible to reduction in commercial papers receipts and heat rate underperformances. 
 
“MARC expects TNB’s rolling guarantee to adequately address any deterioration in the financial capacities of TNB Western Energy and TNB Manjung Five in meeting the sukuk repayments in the event of any major or prolonged issue affecting the power plant. 

“The rolling guarantee covers scheduled semi-annual distributions on the sukuk on a non-accelerable basis. Any changes in TNB Western Energy’s rating and/or outlook would be primarily driven by a revision to TNB’s rating and/or outlook,” it said.