Published on 26 Oct 2018.
RAM Ratings has revised the outlook on the AA2(s) rating of Sarawak Power Generation Sdn Bhd's (SPG or the Company) RM215 million Serial Sukuk Musharakah (2006/2021) (the Sukuk), to positive from stable. This follows the recent (in August 2018) revision of Sarawak Energy Berhad Group (SEB or the Group)'s rating outlook, also to positive from stable. The enhanced rating continues to reflect SEB's strong support for SPG, which the former owns via its 100% held subsidiary, SEB Power Sdn Bhd.
Syarikat SESCO Berhad (SESCO), a wholly owned subsidiary of SEB and SPG's sole off-taker, has been extending various forms of assistance to the Company. The most recent was in 2015, when SESCO allowed SPG to reset the rolling Equivalent Availability Factor (EAF) of Unit 8 of the Company's plant (the Plant) to enable it to minimise reductions in capacity revenue under the terms of its Power Purchase Agreement (PPA). This is further backed by a Letter of Support (LoS) from SESCO, dated 24 September 2007, in which it undertakes to ensure that SPG fully and promptly meets all its financial obligations in respect of the Sukuk throughout the tenure of the facility.
SPG earns full Capacity Payments (CPs) as long as Units 7 and 8 of the Plant maintain a dependable capacity of 105 MW and a minimum EAF of 85%, regardless of the amount of electricity sold. However, Unit 9 earns Energy Payments on a take-or-pay basis.
In 2017, the Plant's performance was affected by lengthy scheduled maintenance. At the same time, Unit 9 also faced operational challenges, which were eventually resolved in 1H 2018. We highlight, however, that the Company's CP losses are within our expectation. Meanwhile, the performance of Unit 7 and Unit 8 improved markedly in 1H 2018. Our sensitised cashflow projections indicate that SPG's minimum sukuk service coverage ratio (SSCR, with cash balances, post-distribution, calculated over a 12-month period on semi-annual principal repayment dates) will remain robust at around 1.50 times between 2018 and 2021. The Company has represented that it will prioritise its sukuk obligations over its capex, the repayment of advances to SEB and dividend distributions.
Typical of independent power producers, SPG is exposed to single-project risk. Additionally, the operations and maintenance (O&M) arrangement outlined in the PPA only covers broad issues of responsibility and compensation. Nevertheless, the absence of a formal O&M agreement between SPG and SESCO is unlikely to give rise to any dispute given the Group's strong commitment, as proven to date.
SPG holds a licence to build, own and operate a 317-MW combined-cycle gas-turbine facility in Tanjung Kidurong, Bintulu, Sarawak.
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