MARC has affirmed its AAAIS rating on TNB Northern Energy's Islamic securities (sukuk) of RM1.625 billion with a stable outlook.
TNB Northern Energy was established to finance and develop a 1,071.43-megawatt combined-cycle gas turbine power plant in Seberang Perai Tengah, Penang, under a 21-year power purchase agreement (PPA) with offtaker Tenaga Nasional (TNB). TNB Northern Energy is 100% owned by TNB Prai which is itself a fully-owned TNB subsidiary.
The rating and outlook are equalised with those of TNB Northern Energy’s ultimate parent TNB, on which MARC currently has a senior unsecured rating of AAA/Stable. The rating equalisation is based on TNB’s commitment in the form of an unconditional and irrevocable project completion support guarantee and post-completion rolling guarantee in favour of sukuk holders. MARC’s assessment is further underpinned by TNB’s undertaking to maintain full ownership of TNB Northern Energy in addition to the operational proximity and financial linkages between the two entities.
The power plant project achieved full commercial operation date (COD) on February 20, 2016, following a 50-day delay from the original scheduled COD. The delay, which was attributed to design issues and defects encountered during the commissioning phase, has resulted in liquidated damages (LD) of RM32.1 million payable to TNB. MARC notes that TNB Northern Energy will claim a LD payment of RM59.6 million from the engineering, procurement and construction (EPC) contractor, Samsung C&T KL. The delay, coupled with the weakening ringgit, has led to a 3.9% increase above the original project cost budget to RM2,587.3 million at completion. The increase, however, remains well within the project sponsor’s completion support guarantee of 10% or RM249 million.
The plant’s operations and maintenance (O&M) duties are carried out by related entity TNB Repair & Maintenance (TNB Remaco) under a 21-year O&M agreement. The rating agency notes that the LD provision under the O&M agreement is not sufficient to recover any revenue losses given that TNB Remaco is only liable for up to 30% in capacity payment reductions and non-reimbursable fuel cost in the event of breaches in the contracted average availability target, net output capacity and net heat rate. Nonetheless, O&M risk is mitigated through the availability of plant warranty and long-term turbine maintenance support provided by Samsung and Siemens respectively. With regard to fuel supply risk, the long-term gas supply agreement with Petroliam Nasional addresses this concern.
The project revenue in the form of availability capacity and energy payments subject to meeting performance standards under the PPA provides sufficient coverage to TNB Northern Energy’s fairly flat debt servicing profile. The company is expected to achieve an average finance service cover ratio (FSCR) without cash balances of 1.31 times during the sukuk tenure. MARC views TNB Northern Energy’s finance service ability as adequate even after taking into account the COD delay which has led the projected cash balance being revised downward by RM4 million to RM33 million as at December 31, 2016. TNB Northern Energy’s designated account balances of RM118 million as at April 30, 2016 is well above the finance service obligations of RM70 million for 2016.
MARC’s sensitivity analysis reveals that the project coverage is only able to withstand mild stresses due to the absence of cash build-up. TNB Northern Energy is expected to return about RM834 million of capital to its shareholders during the sukuk tenure subject to meeting a distribution finance service cover ratio of 1.5 times. The rating agency expects the project sponsor’s rolling guarantee to act as a reliable liquidity source during periods of weaker-than-projected cash flows.
The stable outlook mirrors the outlook on TNB's senior unsecured rating. Any changes in TNB Northern Energy's rating and/or outlook would be primarily driven by a revision of TNB's rating and/or outlook.
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Read the Suroor Asia blog post about MARC's analysis of TNB Western Energy's sukuk