TANJUNG BIN O&M BERHAD - 2017

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 rating reflects the credit strength of parent company Malakoff Power Berhad (MPower) which has provided unconditional and irrevocable undertaking in the form of cash deficiency support to top up any shortfall in the finance service reserve account (FSRA) for the Sukuk Wakalah. MARC has applied a full credit substitution approach on Tanjung Bin O&M’s credit risk assessment with MPower’s senior credit rating of AA-/Stable serving as the rating floor.

The rating also considers Tanjung Bin O&M’s reliance on the operations and maintenance (O&M) service income from related company Tanjung Bin Power Sdn Bhd (TBP) under an O&M agreement (OMA). The rating also benefits from a partial transfer of operational risks to MPower via a sub-OMA. The OMA and sub-OMA are coterminous with the 25-year power purchase agreement between TBP and Tenaga Nasional Berhad (TNB). MPower’s cash generation capacity relies on the utilisation level of TBP’s 2,100-megawatt (MW) coal-fired power plant as well as residual earnings of profit payments and principal redemption of loan stocks in related companies. In this regard, TBP’s standalone credit profile which has an implied rating of AA/Stable from MARC serves as the ceiling for the rating on the Sukuk Wakalah.

Demand risk exposure in Tanjung Bin O&M’s OMA is mitigated by the steady increase in electricity consumption in Peninsular Malaysia and TBP’s high electricity dispatch merit order. For 2016, TBP’s plant utilisation improved as evidenced by the increase in capacity factor and net electrical output to 82.8% and 15,263GWh (2015: 77.0% and 14,156GWh) respectively. While the new 1,000MW gas-fired Manjung unit 5 is expected to commence commercial operations in October 2017, MARC believes TBP’s significant generation capacity and cheaper generation cost provide competitive advantages.

In line with the better net electrical output performance, Tanjung Bin O&M recorded a 7.0% y-o-y growth in revenue to RM335.1 million in 2016. The company generated gross income of RM64 million in 2016 as there was no major overhaul during the year. In addition, no liquidated ascertained damages (LAD) under the OMA were incurred as the TBP plant met performance requirements related to heat rate and unscheduled outage limit. Cash flow from operations (CFO) fell to RM50.0 million as the company further pared down its trade payables. Following the sukuk repayment of RM55 million in 2016, the remaining cash balance stood at RM149.4 million as at end-2016.

Tanjung Bin O&M’s trade and non-trade payables due to MPower and ultimate parent Malakoff Corporation Berhad (Malakoff) remain substantial, collectively accounting for 87.9% of current liabilities. While the payables to parent companies are interest-free and repayable on demand, the rating agency expects the parent companies to make a claim only when Tanjung Bin O&M has sufficient residual cash flow after meeting the sukuk obligations.

Under the updated base case projections, Tanjung Bin O&M is expected to achieve a minimum pre-distribution finance service cover ratio (FSCR) of 2.98 times during the sukuk tenure. The base case FSCR is premised on the plant achieving a capacity factor of 85%. Tanjung Bin O&M is expected to utilise its cash balance to meet the sukuk obligations in 2021 and 2026 as they coincide with scheduled major overhauls. The sensitivity analysis reveals that Tanjung Bin O&M would remain in compliance with the FSCR covenant of 1.25 times under a stressed capacity factor of 50% due to the availability of cash reserves. More than prudent dividend payments and/or heavy working capital needs would increase Tanjung Bin O&M’s reliance on the cash deficiency support provided by MPower.

The stable outlook reflects MARC’s expectations that TBP’s plant performance will remain satisfactory. The rating and outlook of the Sukuk Wakalah are sensitive to changes in the credit profile of MPower which has been providing cash deficiency support.

Major Rating Factors

Strengths

• Fairly predictable cash flows from operations and maintenance of Tanjung Bin power plant;
• Cash deficiency support from ‘AA-’ rated parent Malakoff Power Berhad; and
• Operational risks mostly transferred to MPower through a subcontract O&M agreement.

Challenges/Risks

• Operational performance of Tanjung Bin power plant; and
• Sensitivity of variable operating revenue to demand risk.