Tanjung Bin O&M Bhd - 2014

MARC has affirmed its rating of AA-IS on Tanjung Bin O&M Berhad’s (Tanjung Bin O&M) RM470.0 million Islamic Securities (Sukuk Wakalah) with a stable outlook.

The affirmed rating essentially reflects the reliance on the future cash flows from the operations and maintenance (O&M) services for the 2,100-megawatt (MW) coal-fired power plant owned by related entity Tanjung Bin Power Sdn Bhd (TBP) under the operations and maintenance agreement (OMA) between Tanjung Bin O&M and TBP. The O&M works are subcontracted to Tanjung Bin O&M’s parent company, Malakoff Power Berhad (MPower), under a sub-OMA. The rating considers the adequate cash flow generated from the O&M services to meet the repayment on the Sukuk Wakalah and the extensive operational and credit linkages among Tanjung Bin O&M, MPower and TBP to fulfill the obligations under the OMA and sub-OMA. MARC also draws comfort from the fact that the OMA and the sub-OMA are co-terminous with the power purchase agreement (PPA) between TBP and Tenaga Nasional Berhad (TNB).

MARC acknowledges that Tanjung Bin O&M’s liquidity risk is adequately mitigated by the cash deficiency support undertaking provided by MPower to meet the issuer’s financial obligations should there be a shortfall in the finance service reserve account (FSRA). In this regard, the credit strength of MPower, which has provided two other undertakings, highly hinges on TBP’s cash generation ability and residual earnings derived from profit payments and principal redemption of loan stocks in related companies. Therefore, TBP’s standalone credit profile (MARC’s senior implied rating of AA/Stable) serves as the ceiling for the rating on the Sukuk Wakalah while the MPower’s senior debt rating of AA-/Stable serves as the rating floor.

MARC notes that MPower’s unconditional and irrevocable undertakings to be crucial in supporting Tanjung Bin O&M’s credit profile, particularly during 2013 when the power plant’s dispatch level dipped to 64.0% in 2013 (2012: 79.0%). The unscheduled outages were mainly due to prolonged high load demand on the coal-fired power plant mainly arising from the curtailment of gas supply and usage of inconsistent and poorer coal quality, albeit within the PPA’s specifications. Due to the unscheduled outages, TBP suffered capacity payment losses, and consequently MPower had to pay liquidated damages (LAD) of RM60.0 million on behalf of Tanjung Bin O&M as per its undertaking. Tanjung Bin O&M   has  since  revised  its  overall  maintenance schedule by  bringing forward  major  upgrades  and rectification works. A large part of the turnaround programme was concluded on March 7, 2014 with all three units being able to operate at full capacity since then. As a result of the accelerated major overhaul exercise, Tanjung Bin O&M’s actual financial metrics did not meet the projected figures in 2013. MARC expects Tanjung Bin O&M’s financial performance to turn around in the near term given that operations are now normalised, which would enable the operator to maintain dispatch rates of above 75.0% post the rehabilitation programme of TBP power plant.

The latest base case cash flow projection, which has assumed a revised budgeted expenditure and maintenance schedule, demonstrates that Tanjung Bin O&M is able to maintain robust finance service coverage ratios (FSCR) with a minimum post-distribution FSCR of 2.63 times throughout the sukuk tenure. In the worst case scenario, Tanjung Bin O&M may face challenges in servicing the sukuk on a standalone basis should average plant dispatch rates fall below 65.1% throughout the remaining sukuk tenure, particularly as two-thirds of Tanjung Bin O&M’s projected revenue is expected to be derived from variable operating fees which are a function of total electricity dispatched by TBP’s power plant. MARC also notes that the dispatch rates must be above 73.7% to declare any dividends subject to maintaining a minimum post-distribution FSCR of 2.00 times. Nonetheless, MARC derives comfort from the cash trap mechanism which prevents excessive dividend upstreaming and ensures adequate cash reserves for any major overhaul expenses.

The stable outlook for the rating is based on the maintenance of finance service coverage on the expectation that plant operating performance will normalise and on the assumption that TBP will prudently manage its load requirements going forward. Further factored into the outlook is the cash deficiency support undertaking from MPower which provides a degree of mitigation against any risk of operational underperformance at the power plant.

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