CREDIT ANALYSIS REPORT

Kimanis Power Sdn Bhd - 2012

Report ID 4281 Popularity 4859 views 274 downloads 
Report Date Aug 2012 Product  
Company / Issuer Kimanis Power Sdn Bhd Sector Infrastructure & Utilities - Power
Price (RM)
Normal: RM500.00        
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Rationale

MARC has assigned a rating of AA-IS to Kimanis Power Sdn Bhd’s (Kimanis) RM1.16 billion Sukuk Programme. The outlook on the rating is stable. Kimanis is a 60:40 joint venture between PETRONAS Gas Berhad and Sabah state-owned entity NRG Consortium (Sabah) Sdn Bhd (NRG). NRG is an indirect wholly-owned subsidiary of Sabah state’s investment arm Yayasan Sabah Group (YSG).

Kimanis will issue sukuk in two series under the programme, the first series of up to RM860 million begins to amortise in 2016 while the second series of up to RM300 million will start to amortise in 2015. Drawdowns from the Sukuk Programme would be used to part-finance the development, design and construction of a 285-megawatt (MW) combined-cycle gas turbine power plant in Kimanis Bay, Sabah, and its initial working capital. The estimated project costs of RM1.47 billion including financing costs during construction will be funded through a 78:22 debt-to-equity financing mix.

The assigned rating reflects a well-structured power purchase agreement (PPA) with achievable performance thresholds and availability-based capacity payments in addition to pass-through of fuel and variable expenses to creditworthy offtaker, Sabah Electricity Sdn Bhd (SESB). Offtaker credit risk is deemed to be low on account of Tenaga Nasional Berhad’s (TNB) 80% ownership interest in SESB. MARC continues to maintain a senior unsecured debt rating of AAA/Stable on TNB. The rating also reflects low technology risk, expectation of adequate operating performance as required by the PPA, limited fuel supply risk and strong commitment of project sponsors as evidenced by the sponsors’ undertaking to provide contingency financial support during the project’s construction phase. MARC believes that the project sponsors possess a strong strategic and financial interest in the success of the project.

The rating is constrained by remaining construction and completion risk in the project prior to achieving the commercial operations date of generating blocks 1, 2 and 3 by December 2013, February 2014 and April 2014, respectively. Construction and completion risks are meaningfully moderated by Kimanis’ lump sum engineering, procurement and construction (EPC) contract with the CTCI Corporation-led consortium, the EPC contract’s adequate liquidated damages, performance guarantee and warranties, the appointment of a competent project management consultant, and sponsors’ contingency financial support during the project’s construction phase.

Construction of the plant is on schedule with physical progress at 66.06% as at May 31, 2012 against scheduled progress of 66.01%. The project’s independent consulting engineer, Sinclair Knight Merz, opines that the Taiwan-based construction consortium leader, CTCI Corporation (CTCI Corp) has the experience and resources to undertake its role. CTCI has provided a 10% performance bond and performance guarantee for the power plant. The performance guarantee is backed by a similar guarantee from General Electric Company (GE), the manufacturer of the plant’s three 6FA+e gas turbines.

Availability-based capacity payments from SESB under the PPA are expected to cover fixed expenses, debt service payments and provide residual cash flow for project owners subject to the achievement of an average availability target (AT) of 94% throughout the PPA tenure. The PPA allows for full pass-through of fuel cost to SESB contingent upon the power plant operating within the specified heat rates. Contingent upon successful commissioning of the power plant and adherence to the routine maintenance schedule, Kimanis’ risks of failing to meet PPA performance thresholds are low due to a combination of use of commercially proven power generation technology, performance incentives given to operation and maintenance (O&M) operator, Kimanis O&M Sdn Bhd, and the operator's familiarity with power plant operations. A contractual service agreement with GE Energy Parts International LLC and GE Power Systems (Malaysia) Sdn Bhd for the planned maintenance of Kimanis’ three gas turbine generators offers added comfort.

The PPA provides for two-tiered capacity payment rates which step down from RM53.00 per kW per month to RM31.50 per kW per month from the 16th year of operations onwards. The tariff structure supports strong projected debt service coverage with base case minimum and average finance service cover ratios (FSCRs) of 2.89 times and 6.84 times respectively over the tenure of the Sukuk Programme. Projected cash flows assume a net plant capacity factor of 90% and heat rates within the limits of the PPA. MARC’s cash flow sensitivity analyses indicate that Kimanis’ cash flows are most susceptible to construction cost overruns, project delays and longer collection of receivables followed by lower plant availability and higher actual O&M variable costs. The project’s exposure to construction cost overruns and delays in start-up is partly mitigated by the project sponsors’ undertaking to provide contingency financial support of up to RM50 million for the purpose of meeting debt service obligations during the construction phase and a further RM50 million for construction cost overruns.

The stable outlook reflects MARC’s expectations that the construction of the power plant would be completed on schedule and within budget. With the completion and successful commissioning of the power plant, Kimanis’ rating may be revised upwards to reflect the elimination of construction risk in the project.

Major Rating Factors

Strengths

  • A take-or-pay power purchase agreement which allocates demand risk to offtaker;
  • Proven power generation technology;
  • Adequately structured project agreements; and
  • Strong financial profile of project sponsors.

Challenges/Risks

  • Construction delays and cost overruns; and
  • Exposure of maintenance expenses to foreign exchange.
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