RAM Ratings reaffirms AA2(s) rating of Sarawak Power Generation’s sukuk programme

Published on 16 October 2012

RAM Ratings has reaffirmed the AA2(s) enhanced long-term rating of Sarawak Power Generation’s (“SPG” or “the Company”) Serial Sukuk Musharakah (“Sukuk”) of up to RM215 million, with a stable outlook. The enhanced rating remains supported by a strongly-worded letter of support from Syarikat SESCO Berhad (“SESCO”) – Sarawak’s state electricity company and a wholly-owned subsidiary of Sarawak Energy Berhad (“SEB”).

SPG is an independent power producer (“IPP”), which converted its 210 MW open-cycle, gas-turbine (“OCGT”) facility to a 320 MW combined-cycle, gas-turbine (“CCGT”) facility in Tanjung Kidurong, Bintulu, Sarawak. The OCGT comprise of 2 gas turbines (known as Units 7 and 8) which are connected to 2 heat-recovery steam generators (“HRSGs”) and a steam-turbine generator (“STG”) (collectively known as “Unit 9”).

The Company’s sturdy business profile stems from the favourable terms of its power purchase agreement (“PPA”) with SESCO. The Company earns full capacity payments (“CPs”), so long as its OCGT meet the operating parameters specified in the PPA. Furthermore, all risks associated with fuel supply are assumed by SESCO, which is responsible for its procurement, delivery and cost.

Based on RAM Ratings’ sensitivity analysis, SPG is expected to generate a healthy average annual pre-financing cashflow of around RM42 million, which translates into projected minimum and average sukuk service coverage ratios (“SSCRs”) – with cash balances, post-distribution, calculated over a 12-month period on semi-annual principal repayment dates – of 1.39 times and 1.72 times respectively. This assumes that the Company will optimise distributions to its shareholders while adhering to its financial covenants throughout the tenure of the Sukuk on a forward-looking basis. We note that excessive distributions in the near term, although allowed by the distribution covenants, may weaken SPG’s debt coverage in the future.

Our assessment of SPG also takes into account the problems encountered by Units 7 and 8, i.e. derated dependable capacities and longer outages, due to the integration of these units into Unit 9. This resulted in CP losses of RM2.27 million (representing close to 5% of SPG’s potential CPs per annum) in fiscal 2011. Nevertheless, under our sensitised cashflow projections, which have factored in the abovesaid issues, the Company’s debt-servicing ability is anticipated to remain intact.

Further, the absence of a formal operation and maintenance agreement between SPG and SESCO raises the possibility of disputes in the event of a breakdown. The arrangement outlined in the PPA only covers broad issues on responsibility and compensation. As with other IPPs, SPG is exposed to single-project risk.

Media contact

Jocelyn Chiang

(603) 7628 1124

jocelyn@ram.com.my