RAM Ratings has reaffirmed the AA2/Stable rating of Tanjung Bin Power Sdn Bhd’s RM4.5 bil Sukuk Ijarah Programme. The rating is premised on the sterling operating performance of Tanjung Bin Power’s 2,100 MW coal-fired power plant which underpins the Company’s robust cash flow generating ability and debt coverage levels.
Also supporting the rating is the Company’s strong business profile, backed by the favourable terms of its power purchase agreement (PPA) with sole offtaker, Tenaga Nasional Berhad. Like other independent power producers, however, Tanjung Bin Power is predisposed to regulatory and single-project risks.
RAM notes that the plant had delivered a healthy operational performance in the last seven years, with various improvements since 2014. This is evident from the plant’ss ability to earn full available capacity payments (derived from 85% of its capacity rate financial (CRF) – the cornerstone tariff that underscores its revenue) by operating below the PPA’s unscheduled outage limit (UOL) of 6%.
Its rolling 365-day unscheduled outage rate remains commendable although relatively higher at 4.8% as at end-2021, against 2.6% in the preceding year. The Company continued to earn extra daily utilisation payments (underpinned by the remaining 15% of its CRF) in FY Dec 2021. Overall, bonus payments recorded in most months due to higher dispatch levels more than offset minimal losses incurred in view of a limited load during the pandemic and a spike above the PPA’s peak-hour UOL of 3.5% in November 2021.
Tanjung Bin Power was able to fully pass on fuel costs to TNB in fiscal 2021 despite operating marginally above the heat rate requirements of the PPA, owing to higher energy payments or EPs led by surging coal prices. Having said that, Tanjung Bin Power is projected to breach the PPA’s contracted average availability target of 91% for the current contract-year block (2019-2022) due to extended planned outages in 2019 and major overhauls budgeted for 2022. This will result in a small Availability Target payment in 2023, which is not expected to dent Tanjung Bin Power’s strong cashflow.
The Company’s finance service coverage ratio (FSCR, with cash balances, post-distribution) was a robust 4.59 times on the sukuk repayment date of 16 August 2021, slightly lower than our projection of 4.66 times. This was mainly due to higher dividend payments in FY Dec 2021 on the back of a better than expected financial performance, supported by higher EPs. Moving forward, we expect the Company to register annual FSCRs (without cash balances) of less than 1 time, indicating its reliance on brought-forward cash balances to meet sukuk obligations.
As in most project finance transactions, Tanjung Bin Power may opt to pay dividends to its shareholders if it meets distribution covenants under the transaction, which include achieving an FSCR (with cash balances) of at least 1.65 times after distribution. In determining the amount of dividends to be paid, we expect the Company to be mindful of its longer-term cashflow profile while meeting distribution covenants. Excessive distributions (without breaching covenants) in the early years could compromise Tanjung Bin Power’s future debt service coverage. RAM’s stressed cashflow projections indicate that the Company will be able to achieve the respective minimum and average annual FSCRs (with cash balances, post-distribution) of 1.65 times and 2.65 times during the tenure of the Sukuk.
