MARC AFFIRMS AA-IS RATING ON KIMANIS POWER SDN BHD’S RM1,160.0 MILLION SUKUK PROGRAMME

MARC has affirmed its AA-_IS rating on Kimanis Power Sdn Bhd's (KPSB) RM1,160.0 million Sukuk Programme (sukuk) with a stable outlook. The affirmed rating incorporates the favourable terms of KPSB’s 21-year power purchase agreement (PPA) with the offtaker Sabah Electricity Sdn Bhd (SESB). The PPA transfers demand risk and fuel price risk to SESB, an 83%-owned subsidiary of Tenaga Nasional Berhad (TNB). MARC maintains a senior unsecured debt rating of AAA/Stable on TNB. The affirmed rating also considers the full commercial operations of KPSB’s 285-megawatt (MW) combined-cycle gas-fired power plant at Kimanis Bay, Sabah in 2014 following a delay. The power plant’s three generating blocks (GB), namely GB1, GB2 and GB3, achieved commercial operations date (COD) in May 2014, July 2014 and November 2014 respectively. KPSB also benefits from the substantial involvement of majority shareholder PETRONAS Gas Berhad (PGB) in the power project through a secondment of key personnel and the gas sale agreement (GSA) with PGB’s parent Petroliam Nasional Berhad (PETRONAS). The GSA fully secures gas fuel supply until June 2029.

MARC notes that as full COD was achieved in November 2014, a delay of about eight months from the original project COD, KPSB recorded total loss in available capacity payment (CP) of RM102.5 million and incurred additional variation costs of RM49.4 million. The delay was caused by late completion of transmission lines connecting the plant to the power grid, and in addition the plant was affected by a breach in the unplanned outage rate (UOR) limit of 4% at GB1 and GB2 during the year. As a result, the CP of RM72.5 million received in 2014 was 12.4% below projections. The UOR breach was mainly caused by gas supply disruption which was resolved in February 2015. MARC also observes that gas supply issue, coupled with a malfunction of the gas turbine damper at GB1, had led to a breach of stipulated PPA heat rates on several occasions in May and July 2014. Consequently, KPSB did not achieve full pass-through of fuel costs in 2014; nonetheless total energy payments (EP) of RM79.1 million received in 2014 was 29.1% higher than projections due to an increased use of distillates.

MARC believes while it is common for a power plant to experience minor glitches in its initial operating period, the operations and maintenance (O&M) risk of the project is sufficiently mitigated by the plant’s commercially proven technology, gas turbine contractual maintenance arrangements and adequate performance incentives given to the operator, Kimanis O&M Sdn Bhd (KOMSB). The rating agency also draws comfort from the fact that KPSB has not experienced further major unplanned outages since the gas supply disruption issue was resolved.

KPSB generated its first revenue of about RM1.7 billion in 2014, of which RM1.6 billion was a one-off revenue from the sale of the power plant (under IC Interpretation 4 which requires lease accounting to be applied to its PPA with SESB). Actual total CPs and EPs billed for 2014 stood at RM151.6 million. Correspondingly, the company registered positive cash flow from operations (CFO) of RM28.3 million, albeit below the projected CFO of RM55.9 million. However, KPSB’s cash balances of RM174.2 million as at end-2014 is sufficient to cover profit payments and principal redemption totalling RM92.4 million under the sukuk programme in 2015. Any liquidity risk is mitigated by the cash trap mechanism that would ensure sufficient cash build-up to provide a buffer against any performance-related issues, particularly during the initial two years of full operations. MARC expects KPSB’s leverage ratio which stood at 1.53 times (x) in 2014 to decrease progressively with the accumulation of retained earnings and paring down of the outstanding rated sukuk.

Under KPSB’s updated financial projections, the project’s financial service cover ratio (FSCR) including cash balances is expected to average at 2.63x and not fall below 1.87x over the remaining tenure of the sukuk programme. The reasonably strong projected FSCRs, which are well above the covenanted level of 1.25x, are expected to provide some protection against any decline in forecast plant availability.

                            

The stable rating outlook on the sukuk programme incorporates MARC’s expectations that the power plant’s operating performance will be in line with projections. Any upgrade on the rating would hinge on the plant achieving sustainable and satisfactory operational performance post-COD. However, the rating would come under pressure if (1) the plant’s operations underperform significantly, leading to a weakening of KPSB’s liquidity position; (2) the offtaker’s credit profile deteriorates; and/or (3) MARC’s assessment of the sponsors’ support changes.

Contacts: Jasmine Kua, +603-2082 2280/ jasmine@marc.com.my; David Lee, +603-2082 2255/ david@marc.com.my

August 25, 2015