Published on 15 Mar 2023.
RAM Ratings has reaffirmed the AAA/Stable rating of Manjung Island Energy Berhad’s (MIEB) RM3.86 bil Islamic Securities (2011/2030) (Series 1) as well as the enhanced AAA(s)/Stable rating of its RM990 mil Islamic Securities (2011/2031) (Series 2).
The reaffirmation of Series 1 is premised on the superior cash generating ability and liquidity position of TNB Janamanjung Sdn Bhd (TNBJ or the Company) – MIEB’s sole source of cash flow – despite various technical issues faced by the Company. MIEB is a special-purpose vehicle established to raise funding for the construction of TNBJ’s 1,010 MW coal-fired power plant (GF2) next to its existing 2,070 MW coal-fired Sultan Azlan Shah power plant in Perak (GF1) (collectively, the Plants). Series 2’s enhanced rating reflects an irrevocable and unconditional guarantee from TNBJ’s ultimate parent, Tenaga Nasional Berhad (TNB, rated AAA/Stable by RAM). By virtue of a Purchase Undertaking between MIEB and TNBJ, RAM views both entities in aggregate from a credit perspective.
As per the terms of its power purchase agreements (PPAs) with TNB for GF1 and GF2, the Company is entitled to full available capacity payments (ACPs) subject to operating within the parameters of the PPAs, irrespective of the quantum of electricity generated. TNBJ also receives energy payments via a fuel cost pass-through mechanism. The Plants’ performance remains volatile, with GF1 and GF2 recording rolling unscheduled outage rates (UORs) of 9.5% and 16.5%, respectively, as at end-August 2022 (end-December 2021: 7.5% and 18.7%). While lower than FY Dec 2021’s RM204.9 mil, the Company’s ACP losses stayed hefty at RM126.5 mil in 8M FY Dec 2022 as it breached the 6% UOR limit stipulated in the PPAs with TNB.
Recurring boiler tube leakages did not prevent GF1 from meeting the PPAs’ 91% availability target (AT) for its most recent contract year block (2018-2021). GF2 however, owing to a major overhaul which ran from November 2022 to February 2023 and previously planned outages brought forward by management to minimise ACP losses, is likely to breach the AT requirement (contract year block: 2020-2023).
Notwithstanding the Plants’ underperformance, the higher than expected revenue losses were largely moderated by fuel margins collected by TNBJ amid rising coal prices, lower shareholder distributions as well as better investment returns in the past year. TNBJ’s strong cash reserve (RM1.04 bil as at 25 November 2022) is expected to alleviate any cashflow impact arising from potential ACP losses and AT penalties in the future.
Under RAM’s sensitised cashflow analysis, which incorporates the standby letters of credit (SBLCs) procured by Tenaga Nasional Berhad for the transaction, TNBJ’s debt servicing ability is expected to stay superior with respective minimum and average annual finance service coverage ratios (with cash balances, post-distribution) of 3.77 times and 5.73 times throughout the remaining tenure of Series 1. Series 2 is structured with a RM990 mil bullet principal repayment on 25 November 2031 after the full redemption of Series 1, while its profit payments rank pari passu with Series 1 during the tenure of the latter. We expect the Company to continue to exercise caution in future distributions to preserve its debt coverage and ensure sufficient cash is built up to fully meet Series 2’s bullet repayment, as represented by the management.
TNBJ remains exposed to regulatory and single-project risks, like other independent power producers. As coal-fired power plants are the focal point of the government’s carbon reduction policies, RAM is of the view that the Company may be faced with tighter environmental regulations in the future. Going forward, coal plants will increasingly face challenges in obtaining financing or insurance support.
Seri Nuralya Munawir
(603) 3385 2484
Chong Van Nee, CFA
(603) 3385 2482
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Ratings on Manjung Island Energy Berhad