TANJUNG BIN O&M BERHAD - 2018

MARC has affirmed its AA-_IS rating on Tanjung Bin O&M Berhad’s RM470.0 million Islamic Securities (Sukuk Wakalah) with a stable outlook.

Tanjung Bin O&M, a wholly-owned subsidiary of Malakoff Power Berhad (MPower), provides operations and maintenance (O&M) services to a 2,100-MW coal-fired power plant under an O&M agreement (OMA) with sister company Tanjung Bin Power Sdn Bhd (TBP). The power plant is owned by TBP, a subsidiary of Malakoff Corporation Berhad (Malakoff), the parent of MPower.

The rating reflects the credit strength of MPower which has provided an 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 is supported by the fairly predictable cash flow that Tanjung Bin O&M generates as the O&M operator of the TBP power plant and by the 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 (PPA) between TBP and Tenaga Nasional Berhad (TNB).

The stable outlook incorporates MARC’s expectation that the TBP power plant will sustain its performance and MPower will maintain its credit profile to support its ability to meet its financial obligations. Any material changes in the credit quality of TBP and/or MPower would lead to downward rating pressure given the substantial operational and financial linkages between the entities.

MPower undertakes the O&M of its parent Malakoff’s majority-owned domestic power generation facilities and receives interest income from loan stocks in the group’s subsidiaries/independent power producers (IPP) including TBP. Its cash generation capacity mainly relies on the utilisation level of the TBP power plant and residual earnings of profit payments and principal redemption of loan stocks. In this regard, TBP’s standalone credit profile which has an implied rating of AA/Stable from MARC serves as the rating ceiling for 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. This is reflected by a higher average capacity factor and net electrical output of 86.2% and 15,856GWh in 2017 (2016: 82.7%; 15,263GWh). MARC is of the view that TBP will continue to rank high on TNB’s dispatch merit order due to its reliability and competitive generation costs.

Tanjung Bin O&M recorded marginal revenue growth to RM340.3 million in 2017 but higher maintenance cost and utility charges led to lower gross profit of RM62.1 million. Tanjung Bin O&M incurred minimal liquidated ascertained damages under the OMA for 2017. Cash flow from operations rose to RM57.6 million on the back of better working capital management. Cash balance stood at a healthy RM141.1 million as at end-2017. Tanjung Bin O&M’s trade and non-trade payables due to MPower and its parent Malakoff remain substantial, collectively accounting for 87.4% of current liabilities of RM398.6 million as at end-2017. These payables 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 its sukuk obligations.

Based on the latest cash flow projections, the base case pre-distribution finance service cover ratio (FSCR) averages 14.70x during the sukuk tenure. The project coverage is premised on the plant achieving a capacity factor of 85% which is deemed reasonable under normal operating conditions without any prolonged outages. Tanjung Bin O&M is expected to rely on its cash balance to meet its next sukuk payment of RM55 million in 2021 which coincides with the first of its three major scheduled overhauls over the remaining sukuk tenure.

The cash flow projections have not factored in any dividend payouts in view of the substantial outstanding trade and non-trade payables due to MPower and Malakoff. In the event of dividend payouts and/or higher contingent expenditure, Tanjung Bin O&M’s reliance on the cash deficiency support from MPower will increase. The restrictive post-distribution FSCR and debt-to-equity ratio of 2.00x and 4.00x mitigate leakages.

Major Rating Factors

Strengths

• Fairly predictable cash flows from operations and maintenance of Tanjung Bin power plant;
• Cash deficiency support from 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.