CREDIT ANALYSIS REPORT

KIMANIS POWER SDN BHD - 2019

Report ID 6012 Popularity 208 views 26 downloads 
Report Date Oct 2019 Product  
Company / Issuer Kimanis Power Sdn Bhd Sector Infrastructure & Utilities - Power
Price (RM)
Normal: RM500.00        
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Rationale

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 rating affirmation factors in the favourable terms of KPSB’s 21-year power purchase agreement (PPA) under which the demand risk is allocated to the offtaker Sabah Electricity Sdn Bhd (SESB). Tenaga Nasional Berhad (TNB), which has a MARC rating of AAA/Stable, has an 83.0% stake in SESB. This credit strength as well as that of PETRONAS Gas Berhad (PGB), a major shareholder in KPSB, and the long-term gas sale agreement with PETRONAS underpins the rating. Moderating the rating are the ongoing concerns on the electricity supply situation in Sabah and projected flat demand growth.

The stable outlook is premised on KPSB’s ability to maintain its plant performance within the PPA requirements. Any unexpected weakness in plant performance that would impact KPSB’s debt servicing ability and/or if the credit profile of SESB deteriorates, may trigger downward rating pressure.

KPSB owns and operates the 285-megawatt (MW) combined-cycle gas-fired power plant at Kimanis Bay, Sabah. The power plant has performed well within the PPA requirements in 2018 and received capacity payments of RM202.1 million in line with the budget. Its average availability target was 94.85% in 2018, placing it in a strong position to meet the contracted average availability target of 93.08% for the current contract year block for the period 2017-2019. For 1Q2019, KPSB’s average availability target stood at 98.49%. In respect of energy payments, KPSB received a higher-than-budgeted sum of RM139.2 million as the power plant operated on the more expensive diesel fuel in August 2018 following a scheduled maintenance shutdown of the gas supplier. KPSB’s plant was able to fully-pass through its fuel costs to SESB as the generated heat rates were within the PPA requirements.

In 2018, KPSB registered lower pre-tax profit of RM67.7 million (2017: RM82.8 million) due to unrealised losses from foreign currency hedging contracts related to the US-dollar based contractual service agreement with General Electric Company (GE) which undertakes planned maintenance on the gas turbines. Excluding these unrealised losses, pre-tax profit would increase by 16.1% y-o-y to RM98.2 million. This is mainly attributed to lower maintenance fees following fee renegotiations with GE in 2017.

CFO rose to RM160.1 million (2017: RM107.0 million) in 2018. As at end-August 2019, KPSB's designated accounts had an outstanding balance of RM138.9 million, sufficient to meet its upcoming repayments of RM12.7 million (Series 2) and RM16.8 million (Series 1) in December 2019 and February 2020. Under the base case cash flow projections, KPSB’s minimum and average pre-distribution FSCR with cash balances stand at 1.81x and 3.43x. Among the key assumptions is the plant load factor ranging between 65.0% and 84.0%. Sensitivity analysis shows that KPSB is more susceptible to a reduction in plant availability target compared to heat rate degradation or an increase in operating costs throughout the sukuk tenure.

MARC also notes that the ongoing arbitration proceedings with SESB may have an impact on KPSB’s financial position. On September 16, 2019, the arbitration tribunal agreed to both parties’ request to suspend arbitration proceedings for an additional two weeks to allow them to submit relevant reports. The rating agency understands that both parties are negotiating a settlement of the disputes.

Major Rating Factors

Strengths

  • Demand risk allocated to offtaker;
  • Strong financial profile of project sponsors; and
  • Adequately structured project agreements.

Challenges/Risks

  • Resolving arbitration process with offtaker;
  • Mid-load demand in Sabah; and
  • Plant performance risks.
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