Kimanis Power Sdn Bhd - 2014

MARC has affirmed its AA-IS rating on Kimanis Power Sdn Bhd's (KPSB) RM1,160.0 million Sukuk Programme (sukuk) with a stable outlook. The rating incorporates the impending commencement of full commercial operations of KPSB’s 285-megawatt (MW) combined-cycle gas-fired power plant at Kimanis Bay in Sabah and its long-term power purchase agreement (PPA) with a creditworthy utility, Sabah Electricity Sdn Bhd (SESB), as well as substantial involvement of majority shareholder PETRONAS Gas Berhad (PGB) in the project. The rating also considers KPSB’s adequately structured key project contracts which allocate fuel price and performance risks to the project parties, namely the engineering, procurement, construction and commissioning (EPCC) contractor and the operation and maintenance (O&M) operator. The project's gas fuel supply is also fully secured until June 2029 under a gas sale agreement (GSA) with PGB’s parent Petroliam Nasional Berhad (PETRONAS).

MARC observes that no construction risk remains in the project; however, delays in the construction of the 132 kilovolt (kV) and 275kV transmission lines connecting the plant to a main grid have led to five to six months of delay in commencing commercial operations for the project’s three generating blocks, GB1, GB2 and GB3. The impact from the approximately three-month delay of gas supply from the Sabah Oil and Gas Terminal (SOGT) was mitigated by using diesel. Subsequently, first gas was delivered in January 2014 in accordance with the GSA requirements. While the 275kV transmission line is expected to be completed only by 1Q2015, in November 2013, SESB erected and energised two 132kV transmission lines to facilitate the power transmission from the plant to the grid. Following this, GB1 and GB2 achieved commercial operations on May 16 and July 22, 2014, respectively. In addition, GB3 declared its initial operations date on May 29, 2014 and MARC understands that GB3 is expected to declare commercial operations by end-September 2014. 

Nonetheless, as a result of extension of time (EOT) claims due to plant commissioning delays, KPSB has incurred EPCC cost overruns of about RM50.0 million. Although the bulk of this cost is likely to be met by the balance of project funds, MARC believes additional liquidity buffer for the project would likely come from the project’s cash-funded finance service reserve account (FSRA) of RM18.0 million and project sponsors’ undertaking to provide cash deficiency support of up to RM50.0 million to fund KPSB’s debt service requirements in addition to cost overruns support for up to RM50.0 million. MARC also notes that KPSB is negotiating with offtaker SESB to exercise a provision in the PPA that allows KPSB to claim deemed COD and available capacity payment streams during delayed commissioning periods caused by the offtaker.

In respect of the latest base case cash flow which incorporates the EOT costs and zero deemed COD capacity revenues, KPSB’s minimum and average finance service coverage ratios (FSCR) stand at 1.74 times and 3.03 times respectively. MARC’s sensitivity result shows that KPSB will still be able to meet its payment obligations with further cost overruns of up to RM73.9 million without the sponsors’ undertaking. MARC also draws comfort from the cash trap mechanism governing the shareholders’ distribution that would ensure sufficient cash build-up to buffer against any performance-related issues during the initial two years of full operations. KPSB is to ensure the plant’s net capacity factor of at least 82.5% from 2015 onwards in order to comply with the minimum FSCR covenant of 1.25 times and make any dividend payments to the shareholders and other entitled parties. Once the project is in operation, it is expected to generate stable cash flows under its long-term power contract. Revenues from the PPA extend past the final maturity of the financing in 2028.

The stable rating outlook reflects the strong project economics, very high sponsor support and the comprehensive protection afforded by the provisions of the PPA and the expectation that the plant will not experience any further delay to the revised COD of GB3. Any upgrade on the rating would hinge on the plant achieving sustainable and satisfactory operational performance post-COD. Meanwhile, the rating could be negatively affected by any significant plant underperformance leading to a weakening of its liquidity position, a deterioration in the offtakers’ credit profile and/or changes in MARC’s assessment of sponsors’ support. 

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