MARC Ratings has assigned a preliminary rating of AAAIS to TNB Power Generation Sdn Bhd’s (TPGSB) proposed sukuk programme of up to RM10.0 billion. The rating carries a stable outlook.
Commencing operations on October 1, 2020, TPGSB was incorporated to assume the generation assets and liabilities of its parent Tenaga Nasional Berhad (TNB) under a group-wide transformation plan. In arriving at its rating, MARC Ratings considered TPGSB as an essential component in TNB’s electricity supply chain in the country, underpinned by significant financial linkages within the TNB group. Accordingly, TPGSB’s rating is equalised to TNB’s AAA/Stable rating. TNB’s rating incorporates a two-notch uplift to AAA from its standalone rating of AA, premised on the assumption of very high likelihood of government support to the TNB group based on the vital importance of energy generation, transmission and distribution for the Malaysian economy.
TPGSB’s credit strength reflects its sizeable 59.9% market share in generation capacity in Peninsular Malaysia and the predictable earnings arising from long-term power purchase agreements (PPAs) between its power plant operators and the offtaker, TNB. TPGSB currently owns and manages 15 power plants, and manages three power plants for TNB, two of which are expected to be transferred to TPGSB by end-2022. As further capacity expansion will be in renewable energy in line with the government’s sustainability objectives, TPGSB is currently developing a 300MW hydro project in Kelantan with commercial operations expected to begin in 2027.
Operating profit margin remains healthy, recording 18.2% in 2021. In the medium term, margin could decline to 10.3% in 2025 when the PPAs for five power plants with total capacity of 1,886MW ends. However, the tenure of the PPAs could be extended subject to agreement by stakeholders of the power plants and the Energy Commission. Nonetheless, in the event of non-extension of the PPAs, any decline in revenue would be a modest 5.6% over four years, based on the 2021 revenue. At the same time, as most of the borrowings are under a project finance structure with debt obligations covered by the respective plant’s cash flow, TPGSB’s ability to service its debt obligations would not be affected when the five PPAs end.
Proceeds from drawdown under the proposed programme would be utilised to fund the construction of the aforementioned hydro power plant in Kelantan. Assuming issuance of RM5.0 billion of the sukuk for the project, pro forma debt-to-OPBITDA would be 6.28x for 2021. The group’s cash flow from operations (CFO) is projected to range between RM3.1 billion and RM4.0 billion with CFO interest coverage of between 2.09x and 2.80x in the next five years.