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

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.
SPG is an independent power producer (“IPP”) that built, owns and operates a 320-MW combined-cycle, gas-turbine facility in Tanjung Kidurong, Bintulu, Sarawak, under a 25-year power purchase agreement (“PPA”) with SESCO which expires in February 2024. The rating remains supported by SPG’s strong business profile, underscored by the favourable terms of its PPA with SESCO. SPG earns full capacity payments (“CPs”), so long as its open-cycle gas turbines (Units 7 and 8) 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.
As of the last principal repayment date (i.e. 26 December 2012), SPG had achieved a sukuk service coverage ratio (“SSCR”) of 2.90 times (with cash balances, post-distribution), underscored by a RM51.97 million cash hoard. Based on RAM’s sensitivity analysis, the Company is envisaged to generate an average annual pre-financing cashflow of RM82 million, translating into a projected minimum SSCR (with cash balances, post-distribution, calculated on principal repayment dates) of 2.07 times throughout the Sukuk’s remaining tenure. This assumes distribution payments of RM20 million per annum between fiscal 2014 and 2021, as represented by SPG. Should the management decide to make more distribution payments while adhering to its financial covenants on a forward-looking basis, the SSCR will come in lower. Given this, we expect SPG to cautiously manage its distribution payments, as excessive outflows in earlier years would affect its future debt-coverage levels.
Our assessment of SPG also takes into account the problems encountered by Unit 8, i.e. derated dependable capacities and longer outages during the period under review as a result of major inspections and maintenance. These had resulted in overall CP losses of approximately 5% of its potential CPs for fiscal 2012. Nevertheless, the Company’s future debt-servicing ability is anticipated to remain intact.
Meanwhile, 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
Adeline Poh
(603) 7628 1021
adeline@ram.com.my