[MARC] MARC Ratings affirms AAAIS rating on TNB Power Generation’s sukuk

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’s rating is equalised with that of its parent, Tenaga Nasional Berhad (TNB, AAA/Stable), due to its status as the key energy generation arm of TNB, and the significant operational and financial linkages between the two entities.

TPGSB’s credit strength incorporates its sizeable 57.6% share or 15,675MW of generation capacity in Peninsular Malaysia as at end-June 2024, and predictable earnings from long-term power purchase agreements (PPA) with TNB. PPA payments are availability-based, mitigating demand risk (excluding two hydro plants). Provisions in the PPAs also allow for fuel cost pass-through subject to the power plants meeting operational performance requirements.

TPGSB’s current generation portfolio predominantly consists of coal and gas plants (approximately 84% as of end-1H2024). MARC Ratings notes that as part of TPGSB’s energy transition efforts and to replace several expiring PPAs, TPGSB is moving towards developing renewable energy projects, the most recent of which is the development of up to 70MW of hybrid hydro-floating solar capacity in Chenderoh, with additional developments in Temenggor and Kenyir in the pipeline. Other ongoing renewable energy projects include the Nenggiri hydro project and refurbishment of five hydro plants in Sungai Perak. To fund these projects, total borrowings is expected to increase to around RM24.7 billion over the next four years (June 2024: RM22.6 billion). Notwithstanding the higher borrowings, MARC Ratings views this to be manageable considering the projects’ predictable cash flows, supported by strong contractual positions under their long-term PPAs.

In 1H2024, revenue declined by 17.9% y-o-y to RM9.9 billion, mainly due to lower energy payments caused by lower coal prices. Pre-tax profit recovered to RM461.7 million following the stabilisation of coal prices during 1H2024, with the negative variance between the average coal cost and average coal price narrowing substantially.

Cash flow from operations in 1H2024 declined to RM802.6 million (1H2023: RM1.5 billion), mainly due to the timing of receivables collection, as well as higher repayment of payables. Free cash flow, which stood at RM560.9 million during the period, would be impacted by higher annual projected capex of between RM1.4 billion and RM2.8 billion over 2024-2028. This will be supported by its healthy liquidity position; cash balances stood at RM6.5 billion as at end-1H2024.

Neo Xue Wei, +603-2717 2937/ xuewei@marc.com.my
Ahmad Kamal Syauki, +603-2717 2958/ kamal@marc.com.my
Sharidan Salleh, +603-2717 2954/ sharidan@marc.com.my