Friday, Jan 10, 2003
The rating reaffirmation at AID is supported by the Johor state’s growing water demand; a tariff setting mechanism that provides for an agreed rate of return to the company and a fairly tight issue structure. The rating, however, continues to be moderated by SAJ Holdings Sdn Bhd’s (SAJH) highly leveraged capital structure that reflects the significant utilization of debt to finance the company’s capital expenditure programme, and the high proportion of non-revenue water arising mainly from water leakages.
SAJH holds the concession to exclusively supply water to consumers in Johor for a period of 30 years commencing March 2000. The company’s principal activity is to operate and maintain the water treatment plants (WTPs) as well as the distribution system of treated water in that state. Potable water for Johor is treated and supplied by a total of 43 WTPs; 27 of which are operated and maintained by SAJH.
The aggregate actual water consumption of the eight districts in Johor was 276.3 million m3 during the year 2001 (2000:276.1 mil m³). Revenue from treated water is expected to reach RM350.4 million in fiscal year 2002, with about one-half contributed by commercial customers. The growth of the manufacturing sector will continue to be the driving factor in respect of SAJH’s revenue base.
SAJH currently purchases the bulk of its treated water from Equiventures Sdn Bhd (ESB), Southern Water Corporation Sdn Bhd (SWC) and the Public Utility Board of Singapore (PUB). In a move to reduce purchases from the PUB, SAJH has been requested by the Johor State Government to design, construct, operate and maintain the Semangar WTP together with the related distribution system. The construction of the WTP will be separately financed by Bank Pembangunan dan Infrastruktur Malaysia Berhad (BPIMB). Noteholders’ interests will not be adversely affected as the BPIMB loan will be subordinated to the BaIDS in terms of payment structure and security package.
Under the Concession Agreement (CA), ten staggered increments of water tariff rates are allowed over the 30-year period. The tariff setting mechanism is premised upon SAJH achieving a pre-determined internal rate of return. The State Government is obliged to gazette tariffs or pay compensation to SAJH in circumstances where the gazetted tariff is lower than the applicable Agreed Tariff or implementation of the Agreed Tariff has been delayed. This facilitates the recovery of fixed and variable operating costs and infrastructure capital spending. The next tariff review is in January 2003.
Non-revenue water (NRW), arising mainly from water leakages, was recorded at 385 million litter per day (mld) in year 2001; representing 32% of the total water supply. An extensive capital works programme is currently being undertaken by SAJH to rehabilitate and upgrade the existing water distribution network and consequently reduce NRW to around 20% by the year 2010. Improvements in the billing and collection process have also been made through the implementation of the spot billing system in May 2000. SAJH collection period as at end of August 2002 improved by more than 25% to 35 days compared to the previous period (August 2001:48 days).
Provisions in the financing documents that require the preservation of the single purpose nature of the company; prohibit capital expenditure other than the planned programme of works, and curtail dividend and interest payments on shareholders’ loans/advances unless the requisite debt service coverage ratio is above 2 times; effectively limit interference with project cashflow. Disbursement of funds will be against certificates of completion issued by an independent engineer, preceded by increase in equity to satisfy the required debt-equity ratio. Monies in a Debt Service Reserve Account act as a liquidity buffer to service debts for up to six months in the event of temporary liquidity difficulties.
The sharp increase in revenue in FY2001 incorporated the effect of the scheduled increase in tariff from 1 January 2001 compounded by the population growth and industrial expansion in Johor; and to a lesser extent, increasing contribution from developers (6.4% of total revenue) resulting from the growing application for new reticulation system due to active housing projects. The efficiency of the spot billing system has helped to boost SAJH’s operating margin to 30% from less than 10% previously against a corresponding near-four fold improvement in pretax profit to RM115 million (compared to the annualized pre-tax profit of RM23.64 million in FY2000).
SAJH’s borrowing capacity is constrained by the maximum debt limit of RM2.0 billion as stipulated in the CA. Hence, the utility’s financial flexibility shall be drawn from the listing vehicle i.e. Ranhill Utilities Bhd (listed on the Main Board of the KLSE since June 2002) to tap the capital market on an ongoing basis for its capital expenditure programme.
SAJH holds the concession to exclusively supply water to consumers in Johor for a period of 30 years commencing March 2000. The company’s principal activity is to operate and maintain the water treatment plants (WTPs) as well as the distribution system of treated water in that state. Potable water for Johor is treated and supplied by a total of 43 WTPs; 27 of which are operated and maintained by SAJH.
The aggregate actual water consumption of the eight districts in Johor was 276.3 million m3 during the year 2001 (2000:276.1 mil m³). Revenue from treated water is expected to reach RM350.4 million in fiscal year 2002, with about one-half contributed by commercial customers. The growth of the manufacturing sector will continue to be the driving factor in respect of SAJH’s revenue base.
SAJH currently purchases the bulk of its treated water from Equiventures Sdn Bhd (ESB), Southern Water Corporation Sdn Bhd (SWC) and the Public Utility Board of Singapore (PUB). In a move to reduce purchases from the PUB, SAJH has been requested by the Johor State Government to design, construct, operate and maintain the Semangar WTP together with the related distribution system. The construction of the WTP will be separately financed by Bank Pembangunan dan Infrastruktur Malaysia Berhad (BPIMB). Noteholders’ interests will not be adversely affected as the BPIMB loan will be subordinated to the BaIDS in terms of payment structure and security package.
Under the Concession Agreement (CA), ten staggered increments of water tariff rates are allowed over the 30-year period. The tariff setting mechanism is premised upon SAJH achieving a pre-determined internal rate of return. The State Government is obliged to gazette tariffs or pay compensation to SAJH in circumstances where the gazetted tariff is lower than the applicable Agreed Tariff or implementation of the Agreed Tariff has been delayed. This facilitates the recovery of fixed and variable operating costs and infrastructure capital spending. The next tariff review is in January 2003.
Non-revenue water (NRW), arising mainly from water leakages, was recorded at 385 million litter per day (mld) in year 2001; representing 32% of the total water supply. An extensive capital works programme is currently being undertaken by SAJH to rehabilitate and upgrade the existing water distribution network and consequently reduce NRW to around 20% by the year 2010. Improvements in the billing and collection process have also been made through the implementation of the spot billing system in May 2000. SAJH collection period as at end of August 2002 improved by more than 25% to 35 days compared to the previous period (August 2001:48 days).
Provisions in the financing documents that require the preservation of the single purpose nature of the company; prohibit capital expenditure other than the planned programme of works, and curtail dividend and interest payments on shareholders’ loans/advances unless the requisite debt service coverage ratio is above 2 times; effectively limit interference with project cashflow. Disbursement of funds will be against certificates of completion issued by an independent engineer, preceded by increase in equity to satisfy the required debt-equity ratio. Monies in a Debt Service Reserve Account act as a liquidity buffer to service debts for up to six months in the event of temporary liquidity difficulties.
The sharp increase in revenue in FY2001 incorporated the effect of the scheduled increase in tariff from 1 January 2001 compounded by the population growth and industrial expansion in Johor; and to a lesser extent, increasing contribution from developers (6.4% of total revenue) resulting from the growing application for new reticulation system due to active housing projects. The efficiency of the spot billing system has helped to boost SAJH’s operating margin to 30% from less than 10% previously against a corresponding near-four fold improvement in pretax profit to RM115 million (compared to the annualized pre-tax profit of RM23.64 million in FY2000).
SAJH’s borrowing capacity is constrained by the maximum debt limit of RM2.0 billion as stipulated in the CA. Hence, the utility’s financial flexibility shall be drawn from the listing vehicle i.e. Ranhill Utilities Bhd (listed on the Main Board of the KLSE since June 2002) to tap the capital market on an ongoing basis for its capital expenditure programme.