Published on 24 Apr 2020.
RAM Ratings has reaffirmed the AA3/Stable rating of SPR Energy (M) Sdn Bhd’s (SPR or the Company) Senior Sukuk Ijarah of RM580 mil (the Sukuk). The reaffirmation of the rating reflects the Company’s much-improved operational performance, which helps support its strong debt-servicing ability. SPR is an independent power producer (IPP) that owns and operates a 100 MW combined-cycle, gas-turbine power plant (the Plant) in Kimanis, Sabah.
After having experienced multiple teething problems in its first four years of operations (2014-2018), the Company’s finance service coverage ratio (FSCR) has limited headroom for its current rating of the Sukuk. Under the stressed scenario, SPR is not expected to have any residual cashflow for distribution to its shareholders. Excluding a one-time blip in its FSCR (with cash balances) of 1.46 times in July 2034, our sensitised cashflow analysis indicates that SPR’s minimum and average annual FSCRs should remain strong at a respective 1.50 and 1.80 times throughout the remaining tenure of the Sukuk (base case: 1.60 and 1.87 times). This takes into account our assumption of lower electricity output, higher unscheduled outage rate (UOR), exclusion of potential inflows (arising from compensations and disputed payments) as well as a higher exchange rate relating to its operation and maintenance payments.
The performance of the Plant turned around in fiscal 2019, with a healthy rolling UOR of 2.37% at year-end (2014-2018: average of 7.67%) and minimal reductions of RM2.97 mil in available capacity payments (ACPs, or 2% of its total revenue). SPR had also been able to fully recoup its fuel expenses after having met the required heat rates under its Power Purchase Agreement (PPA). Supported by its consistently strong m-o-m showing in the last 14 months up to February 2020, the Plant’s improved performance is expected to be sustainable as it progresses to a more matured phase. That said, the Sukuk’s rating is sensitive to any unexpected operational issue that could lead to financial losses or elevated costs, given SPR’s limited FSCR headroom.
Notably the Company’s business fundamentals are mainly underscored by the terms of its PPA with Sabah Electricity Sdn Bhd (SESB). SPR is entitled to earn fixed ACPs, so long as it meets its unscheduled outage limits. A smaller portion of its revenue constitutes Daily Utilisation Payments (DUPs), which are determined by the amount of electricity despatched from SESB. While this exposes SPR to some demand risk, the Company has mostly been receiving full DUPs. SESB is deemed a strong counterparty given the ongoing financial support from the Federal Government. Receivables from SESB have generally been promptly settled within two months of invoice receipt.
The PPA’s requirements in the event of non-performance are more stringent than those of the other IPPs, particularly in respect of an immediate penalty for the breach of the stipulated unscheduled outage limit. As the mechanism of risk transfer to General Electric (GE), i.e. the Plant’s operation and maintenance service provider, does not mirror the PPA, any ACP shortfall may not be fully compensated by liquidated damages, thus raising some concern. That said, the appointment of GE provides comfort in terms of addressing operational risk, underpinned by its extensive experience in the power sector.
As with other IPPs, however, SPR is predisposed to regulatory and single-project risks.
Chu Jia Ying
(603) 3385 2519
(603) 3385 2577
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Ratings on SPR Energy (M) Sdn Bhd