KIMANIS POWER SDN BHD - 2016

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 affirmed rating is underpinned by the favourable terms of KPSB’s 21-year power purchase agreement (PPA) with the offtaker, Sabah Electricity Sdn Bhd (SESB), under which demand risk is transferred to the offtaker. SESB is an 83%-owned subsidiary of Tenaga Nasional Berhad (TNB), which has a senior unsecured debt rating of AAA/Stable. The affirmed rating incorporates the Kimanis power plant’s commendable operating performance in meeting PPA requirements in relation to the heat rate and unscheduled outage rate. The rating also considers PETRONAS Gas Berhad’s (PGB) 60% ownership of and substantial involvement in KPSB, the use of standard and well-proven technology and the gas sale agreement (GSA) with PGB’s parent Petroliam Nasional Berhad (PETRONAS) until June 2029 which mitigates fuel supply risk.

KPSB owns the 285-megawatt (MW) combined-cycle gas-fired power plant at Kimanis Bay, Sabah. The operations and maintenance (O&M) of the Kimanis power plant is carried out by Kimanis O&M Sdn Bhd (KOMSB), while planned maintenance work of the gas turbines is governed by a long-term contractual service agreement with General Electric Company (GE).

MARC notes that the Kimanis power plant achieved a lower load factor than the initial projection of 90% since achieving its full commercial operations date (COD) in November 2014 due to the excess capacity situation on the west coast of Sabah. This has led KPSB to revise its load factor assumptions to 60% for the period between 2015 and 2017 in the revised budget. In 2015, the plant’s average load factor was 64.7% (2014: 51.2%). Its energy payment (EP) receipts of RM125.9 million were 16.4% above the budgeted amount in 2015. KPSB’s actual capacity payment (CP) of RM201.6 million was in line with the budgeted amount following the resolution of gas supply issues in early 2015. The plant’s average availability stood at 95.4% during the period under review. MARC also notes that the plant’s average actual heat rates were within the PPA heat rate requirement and KPSB has achieved full pass-through of fuel costs in its first full year of operations.

KPSB recorded higher electricity sales of 1,519.6 gigawatt hours (GWh) in 2015 (2014: 967.0 GWh), reflecting the full commercial operations of its three generating blocks since November 2014. Operating profit margin was 26.8% on the back of electricity sales of RM200.1 million and operation cost of RM166.8 million. Fuel cost per unit generated improved to 5.94 sen per kilowatt-hour (kWh) (2014: 9.82 sen/kWh) due to the lower usage of distillates. Net cash flow improved to RM40.2 million (2014: deficit of RM299.0 million) as the plant incurred lower capital expenditure of RM2.0 million (2014: RM318.7 million). Cash balance stood at RM214.3 million in 2015 while KPSB’s leverage ratio improved to 1.27 times following the repayment of its Series 2, Tranche 1 sukuk amounting to RM35.0 million in December 2015. Going forward, MARC expects KPSB’s leverage ratio to decrease progressively with the accumulation of retained earnings and paring down of the outstanding rated sukuk.

Under Kimanis’ updated financial projections, KPSB’s debt servicing capacity remains adequate with minimum and average finance service coverage ratios (FSCR) of 2.24 times and 3.35 times respectively during the sukuk tenure. The projections are premised on the plant load factor of 60% which will progressively step up to 90% beginning in 2020. Meanwhile, MARC’s sensitivity results show that KPSB’s cash flows are sensitive to reductions in CP and higher-than-projected O&M costs. KPSB can withstand an increase in O&M costs by 73% before breaching its FSCR covenant in 2026. MARC wishes to highlight that the cash balance brought forward from 2015 amounting to RM214.3 million is sufficient to meet the financial obligations in 2016 totalling RM154.0 million.

The stable rating outlook on the sukuk programme reflects MARC’s expectations that the power plant’s cash flow generation will be in line with projections. Conversely, the rating would come under pressure if the plant’s operations underperform significantly, leading to a weakening of KPSB’s liquidity position, and/or if the offtaker’s credit profile deteriorates.

Major Rating Factors

Strengths

• Power purchase agreement which allocates demand risk to offtaker;
• Strong financial profile of project sponsors; and
• Adequately structured project agreements.

Challenges/Risks

• Plant operating at low load factors;
• Partial transfer of performance risks to the operator; and
• Exposure of maintenance expenses to foreign exchange.