MARC Ratings has affirmed its AAAIS rating on TNB Power Generation Sdn Bhd’s (TPGSB) Sukuk Wakalah Programme of up to RM10.0 billion with a stable outlook.
TPGSB is a wholly-owned energy generation arm of Tenaga Nasional Berhad (TNB). It owns and operates 12 power plants and manages three power plants belonging to TNB with a total generation capacity of 15,676MW as at end-September 2023. TPGSB’s credit strength reflects its sizeable 56.9% share of generation capacity in Peninsular Malaysia and its predictable earnings from long-term power purchase agreements (PPA) its power plant operators have with TNB. Except for two hydro plants, the PPAs provide for availability-based payments which mitigate demand risk. Provisions in the PPAs also allow for fuel cost pass-through subject to the power plants meeting the PPAs’ operational performance requirements.
Based on their significant financial and operational linkages, MARC Ratings has equalised TPGSB’s sukuk rating to TNB’s AAA/Stable rating. TNB’s rating incorporates a two-notch uplift premised on the rating agency’s assessment of a very high likelihood of government support to the TNB group, given its strategic role in energy generation, transmission, and distribution for the Malaysian economy.
TPGSB’s revenue in 1H2023 increased by 14.4% y-o-y to RM12.0 billion on loftier energy payments (EP) from higher fuel prices. However, its operating profit margin fell to 5.51% in 1H2023 (1H2022: 14.57%), affected by a steep decline in coal prices resulting in a negative variance between its average coal cost and the applicable coal price used in EP calculations. Coal prices have, nevertheless, been relatively stable since July 2023, alleviating concerns of further adverse fuel margin impact on profitability.
Free cash flow (FCF) generation during 1H2023 remained healthy at RM1.1 billion after meeting capex of RM405.3 million. However, higher projected capex of between RM2.3 billion and RM2.9 billion a year for the hydro power plants in Kelantan and Perak over 2024-2026 could trim FCF going forward. Borrowings are correspondingly projected to increase to around RM24.9 billion in the next three years, mainly to fund the said hydro projects. Notwithstanding this, the projects are earnings accretive, and the cash flows are expected to be sufficient to cover the borrowings.