Published on 15 Feb 2021.
RAM Ratings has reaffirmed the AAA/Stable rating of Manjung Island Energy Berhad’s (MIEB) RM3.86 bil Islamic Securities (2011/2030) (Series 1) and also the enhanced AAA(s)/Stable rating of its RM990 mil Islamic Securities (2011/2031) (Series 2). The reaffirmed rating of Series 1 is premised on our expectation that the debt coverage for Series 1 will remain strong despite the operational issues that TNB Janamanjung Sdn Bhd (TNBJ or the Company) had encountered.
TNBJ is the sole source of cashflow for MIEB, a trust-owned special purpose vehicle established to raise funding for the construction of a 1,010 MW coal-fired power plant (GF2), which is located next to the coal-fired Sultan Azlan Shah power plant in Perak (GF1) with 2,070 MW of dependable capacity (collectively, the Facilities). Given this, we recognise the strong credit link between MIEB and TNBJ, and view both companies in aggregate. The reaffirmed enhanced rating of Series 2 reflects the irrevocable and unconditional guarantee from the ultimate parent of TNBJ, Tenaga Nasional Berhad (TNB, rated AAA/Stable by RAM).
TNBJ boasts a strong business profile, backed by the terms of its Power Purchase Agreements (PPAs) with TNB for GF1 and GF2. Subject to operating within the parameters of the PPAs, the Company is entitled to earn full available capacity payments (ACPs), regardless of the quantum of electricity generated. It is also able to pass through fuel cost fluctuations to TNB via energy payments.
Due to a malfunctioning rotor in one of its units since August 2019, GF1 ended the year with 3,222 hours of forced outages (2018: 776 hours). This had resulted in RM158 mil of ACP losses in 2019. While the problem was fixed in February 2020, the Company had incurred ACP losses of RM81 mil in 1H 2020. Meanwhile, GF2 has been affected by intermittent operational disruptions, with 555 hours of forced outages and RM5.2 mil of ACP losses in 2019 (2018: 425 hours and RM8.9 mil). As such, our sensitised cashflow maintains the assumption of some underperformance by both GF1 and GF2.
Pursuant to the reorganisation plan announced by TNB, all the operation and maintenance (O&M) works of its power-generating subsidiaries, including TNBJ, will be carried out by a new entity, i.e. TNB Power Generation Sdn Bhd (TNB Genco). Under the new arrangement, TNBJ will benefit from the technical expertise of TNB Genco and a loss-sharing mechanism courtesy of the performance guarantees provided by TNB Genco via liquidated damages. In return, TNBJ will have to pay the latter O&M fees, which will gradually increase its operating expenses going forward.
Taking into account the incremental operating expenses, outages at the plant, and some distributions on its redeemable preference shares, RAM’s sensitised cashflow projections indicate that TNBJ will still be able to register respective minimum and average annual finance service coverage ratios of 2.0 and 4.9 times (with cash balances, post-distribution) throughout the tenure of Series 1. Supported by its well-matched debt-repayment profile, comfortable cash holdings and stringent covenants under Series 1, the Company’s debt coverage remains solid. TNBJ will continue to be cautious with respect to its future distributions in aim of preserving its debt coverage.
Meanwhile, Series 2 has been structured with a RM990 mil bullet principal repayment due on 25 November 2031. TNBJ is anticipated to be able to meet this obligation as it has been building up its cash balances to meet the repayments of Series 2. Its profit payments, meanwhile, rank equally with those of Series 1 in terms of cash distributions during the tenure of Series 1.
Goh Kwan Kheen, Timothy
(603) 3385 2496
(603) 3385 2577
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Ratings on Manjung Island Energy Berhad