KIMANIS POWER SDN BHD - 2017

MARC has affirmed the AA-_IS rating on Kimanis Power Sdn Bhd's (KPSB) RM1,160.0 million Sukuk Programme (sukuk) with a stable outlook. KPSB is the owner of the 285-megawatt (MW) combined-cycle gas-fired power plant at Kimanis Bay, Sabah.

The affirmed rating continues to be underpinned by the favourable terms of KPSB’s 21-year power purchase agreement (PPA) that allocates demand risk and fuel price risk to the offtaker, Sabah Electricity Sdn Bhd (SESB). SESB is an 83%-owned subsidiary of Tenaga Nasional Berhad (TNB), which has a senior unsecured debt rating of AAA/Stable from MARC. The affirmed rating is supported by the creditworthiness of KPSB’s majority shareholder, PETRONAS Gas Berhad (PGB) and the long-term gas sale agreement (GSA) with Petroliam Nasional Berhad (PETRONAS) until June 2029 which mitigates fuel supply risk.

MARC notes that the power plant’s operations have continued to meet the PPA requirements in relation to heat rate and unscheduled outage rate. The average load factor of the power plant, which currently accounts for about 19% of the current installed generation capacity in Sabah, was higher at 69.7% in 2016 (2015: 64.7%), enabling the power plant to fully pass through its fuel costs to SESB. Additionally, the power plant achieved average availability target of 96.6% in its first contract year block of 2014-2016 against the PPA’s contracted average availability target requirement of 96.3%.

KPSB’s capacity payments were within expectations in 2016 and 1Q2017 while energy payments were higher than the budgeted amount due to higher load factor. In 2016, KPSB’s revenue was stable at RM198.8 million while its operating profit before interest and tax, declined sharply to RM25.9 million due largely to unrealised net foreign exchange losses arising from the fair value assessment of forward foreign exchange contracts. Net cash flow was negative RM66.8 million, largely as a result of a RM100 million sukuk repayment. KPSB’s ending cash balance declined to RM147.6 million in 2016 (2015: RM214.3 million). As at December 31, 2016, KPSB’s finance service cover ratio (FSCR) stood at 2.10 times (x) against a covenant of 1.25x.

Under the base case cash flow projections, KPSB’s minimum and average pre-distribution FSCR with cash balances stand at 1.74x and 2.29x respectively. The projections are premised on a plant load factor of 65% and a MYR/US$ exchange rate of RM4.30 throughout the sukuk tenure. MARC’s sensitivity analysis demonstrates that the projections are more sensitive to reductions in capacity payments and increases in O&M costs than increases in fuel costs. Assuming an increase of 4% in its operating costs, the power plant would need to operate on a load factor of 70% to break even. Going forward, MARC expects KPSB to prudently manage its dividend distributions to maintain sufficient headroom against any plant underperformance and/or unbudgeted outlays. Based on the projections, KPSB is expected to incur an average of RM40 million in dividend distributions over the next three years.

KPSB has entered an arbitration with SESB to recover RM82.9 million of additional costs and deemed capacity payments. These were incurred during the prolonged commissioning phase caused by delays to construction of the 132 kilovolt (kV) and 275kV transmission lines connecting the plant to the main grid. The rating agency is concerned that a prolong dispute between the parties could affect KPSB.

The stable outlook incorporates MARC’s expectations that KPSB would maintain its commendable plant performance within the PPA requirements. Downward pressure on the rating and/or outlook may occur in the event of any significant deterioration in plant performance that weakens KPSB’s debt servicing ability and/or the credit profile of SESB 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

• Ongoing dispute resolution with offtaker;
• Proposal to undertake self-operatorship model; and
• Partial transfer of performance risks to the operator.