KIMANIS POWER SDN BHD - 2018

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. KPSB is the owner of the 285-megawatt (MW) combined-cycle gas-fired power plant at Kimanis Bay, Sabah.

The rating affirmation is underpinned by the favourable terms of KPSB’s 21-year power purchase agreement (PPA) with offtaker Sabah Electricity Sdn Bhd (SESB), an 83.0%-owned subsidiary of Tenaga Nasional Berhad (TNB) (AAA/Stable). The PPA allocates demand risk and fuel price risk to the offtaker. The strong 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 support the rating. The GSA mitigates fuel supply risk. Notwithstanding these strengths, the excess capacity situation in Sabah, projected flat demand growth and potential decline in SESB’s liquidity buffer on the commencement of operations of a solar power plant in 2H2018 moderate the rating.

MARC notes that the current excess capacity situation in Sabah has underlined SESB’s increasing reliance on TNB for operational and financial support. Meanwhile, the stable outlook incorporates MARC’s expectations that KPSB would maintain its commendable plant performance within the PPA requirements. Any unexpected significant deterioration in plant performance that weakens KPSB’s debt servicing ability and/or if the credit profile of SESB deteriorates would trigger downward rating pressure.

KPSB received capacity payments of RM201.6 million and RM100.0 million in 2017 and 1H2018, in line with the budget. The power plant achieved average availability targets of 94.0% and 94.6% for 2017 and 1H2018 in its second contract year block of 2017-2019 against the PPA’s requirement of 93.1%. Meanwhile, KPSB’s energy payments for 2017 and 1H2018 stood at RM126.4 million and RM63.3 million, which were 3.0% and 1.6% higher than the budgeted amount due to an assumed lower load factor of 65.0%. The actual average load factor, however, was 69.8% in 2017 and 1H2018. The power plant was able to fully pass through its fuel cost to SESB as the generated heat rates were within the PPA requirements.

Operating profit before interest and tax improved to RM47.8 million in 2017 (2016: RM25.9 million). This was mainly due to operations & maintenance (O&M) cost savings amounting to RM14.3 million arising from KPSB’s adoption of a self-operating model beginning September 2017. The power plant demonstrated stronger cash flow generation in 2017, with higher net cash flow from operations (CFO) of RM107.0 million (2016: RM98.6 million). However, largely due to higher dividend payout of RM30.0 million, free cash flow widened to negative RM58.4 million. KPSB’s cash and bank balances stood lower at RM120.1 million in 2017. The company’s finance service cover ratio (FSCR) stood at 2.03 times (x) against a covenant of 1.25x as at December 31, 2017.

As at 1H2018, KPSB’s revenue registered a 3.0% y-o-y growth to RM101.2 million on the back of higher energy payment receipts. This notwithstanding, KPSB’s profit before tax declined to RM23.0 million in 1H2018 (1H2017: RM30.5 million) due to high unrealised foreign exchange losses. KPSB’s CFO increased to RM101.2 million compared to RM87.3 million in 1H2017 due to reduced maintenance costs. MARC notes that KPSB has made the schedule repayment of RM20.0 million in June 2018 and RM50.0 million in August 2018 under the sukuk programme.

KPSB also managed to renegotiate lower contractual service agreement fees in 2017 with General Electric, which will only be reflected in the 2018 financial statements. MARC views this move favourably as the contractual service agreement fees totalled RM25.9 million in 2017, representing 18.4% of KPSB’s cost structure. KPSB also reached an agreement with PETRONAS to lower the amount of annual gas intake in light of the mid-load demand in Sabah. This will reduce the risk of a penalty payment if KPSB is unable to meet the 75.0% quota.

Under the base case cash flow projections, KPSB’s minimum and average pre-distribution FSCR with cash balances stand at 1.76x and 3.34x. Among the key assumptions is a plant load factor of 65.0%. Sensitivity analysis also shows that KPSB is more susceptible to a reduction in plant availability target compared to heat rate degradation throughout the sukuk tenure. MARC expects KPSB to prudently manage its dividend distributions to maintain sufficient headroom against any plant underperformance and/or unbudgeted outlays.

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;
• Mid-load demand in Sabah; and
• Assumes plant performance risks.