RAM Ratings has reaffirmed the enhanced rating of Mukah Power Generation Sdn Bhd’s (Mukah Power or the Company) RM665 million Senior Sukuk Mudharabah Programme (2006/2021) at AA2(s)/Stable.

Published on 23 September 2014

RAM Ratings has reaffirmed the enhanced rating of Mukah Power Generation Sdn Bhd’s (Mukah Power or the Company) RM665 million Senior Sukuk Mudharabah Programme (2006/2021) at AA2(s)/Stable. The enhanced rating reflects support for Mukah Power from the larger Sarawak Energy Berhad Group (Sarawak Energy or the Group) that the Company belongs to.
The Group’s support is underlined by a strongly-worded letter of support from Syarikat SESCO Berhad (SESCO, the state utility company of Sarawak and a wholly-owned subsidiary of Sarawak Energy) dated 21 August 2013. This is reinforced by a Supplementary Power Purchase Agreement (PPA) which was signed by Mukah Power and SESCO in March 2014 to raise the tariff received by the Company to ensure that it is financially sustainable and able to meet its financial obligations under the Senior Sukuk.
The stand-alone credit profile of the Senior Sukuk remains supported by minimal demand risk, given the terms of the Supplementary PPA with SESCO, and Mukah Power’s strong short-term debt coverage. The Company is entitled to full capacity payments (CP), irrespective of the quantum of electricity generated, subject to meeting certain performance requirements. Apart from CPs, it is also entitled to energy payments for actual electricity sold, with an annual despatch commitment by SESCO in respect of at least 1,400 GWh (66% net capacity factor).
Meanwhile, the Senior Sukuk’s stand-alone credit profile is moderated by the poor performance of Mukah Power’s plant and the single-project risk to which it is exposed.
In 2013, the plant recorded its worst performance since commissioning. This led to a rolled over financial effect to 1H FY Dec 2014 – the Company sustained RM14 million of CP losses (or 22% of potential full CPs). Elsewhere, operational expenses continued to escalate at double-digit rates in 2013, driven by rising maintenance costs and exacerbated by the absence of an operations and maintenance (O&M) agreement to allow for risk transfer to a third party. The Company underwent a manpower restructuring exercise in early 2014 and has engaged a third-party contractor to perform O&M services and provide guidance for 2 years. The result of these initiatives, however, remains to be seen.
Based on RAM’s sensitised cashflow projections, Mukah Power’s debt-servicing ability is expected to remain strong in the short term, with a minimum Senior Sukuk Service Coverage Ratio (with cash balances, post-distribution, calculated over a 12-month period) of 1.52 times over the next 2 years. However, should future expenditure or CP losses continue to exceed the Company’s expectations, we foresee coverage levels declining to a minimum of 1.08 times over the remaining tenure of the Senior Sukuk. As per Mukah Power’s representation, we assume that the Company will not make any distributions or subordinated payments.
Mukah Power is an independent power producer incorporated to construct, own, operate and maintain a 270-MW coal-fired power plant in Mukah, Sarawak, under a 25-year power purchase agreement with SESCO, which expires on 15 January 2034.

Media contact
Chin Wynn
(603) 7628 1170
chinwynn@ram.com.my