MARC has affirmed its rating on Kapar Energy Ventures Sdn Bhd’s (KEV) RM3,402.0 million Bai’ Bithaman Ajil Islamic Debt Securities (BaIDS) at AA+ID with a stable outlook.

Mar 6, 2013 -

The affirmed rating reflects the sustained improvement in KEV’s operating performance since MARC’s last rating action, as well as the very high probability of support from Tenaga Nasional Berhad (TNB). The affirmation of the rating reflects MARC’s unchanged view of KEV as a strategic subsidiary of TNB and accordingly, that there is a very high likelihood that KEV would receive support from TNB, if needed, on account of KEV’s strong operational and ownership ties with TNB. (MARC currently maintains a senior unsecured debt rating of AAA/Stable on TNB.) The rating affirmation also takes into consideration KEV’s proposed refinancing of the BaIDS.
KEV was established to acquire and operate the Stesen Janaelektrik Sultan Salahuddin Abdul Aziz, or the Kapar Power Station (KPS), the largest multi-fuel thermal power station in Malaysia with a nominal capacity of 2,420 megawatts (MW). KPS consists of four generating facilities (GF) capable of running on coal, natural gas or oil. Distillate, a standby fuel, is also used as back-up fuel for gas turbines. KEV’s BaIDS are secured by a pledge of revenues, in the form of capacity payments (CP) and energy payments (EP), from the operation of the KPS under a 25-year take-or-pay power purchase agreement (PPA) with TNB, expiring in 2029. MARC views the independent power producer’s fourth supplemental agreement to its PPA with TNB, which took effect August 2011, as a credit supportive development given KEV’s lowered risk of capacity payment deductions for dispatch failure.
KPS’ overall unplanned outage rate continued to improve to 6.13% in the financial year ended August 31, 2012 (FY2012) compared to 9.83% in FY2011. Although unplanned outages at GF3 continued to exceed its PPA specified level, the availability of GF3 has improved through rectification works carried out on GF3’s turbines. With improved rolling availability of all the GFs, KEV’s CPs increased by 5.0% to RM662.2 million (FY2011: RM630.6 million). EPs were also higher by 10.7% at RM3.0 billion (FY2011: RM2.7 billion) reflecting a higher dispatch level of 12,188.1 gigawatt hours (GWh), up from 11,789.9GWh in FY2011. Despite higher revenue of RM3.4 billion (FY2011: RM3.2 billion), KEV registered lower operating profit before interest and tax of RM354.5 million (FY2011: RM428.6 million) and pre-tax profit of RM65.1 million (FY2011: RM136.4 million) on the back of lower other operating income and higher operating costs.
Cash flow remained sufficient to meet BaIDS’ debt service, though the redeemable unsecured loan stocks (RULS) and interest on the RULS continue to go unpaid. KEV’s net cash flow from operating activities (CFO) was higher in FY2012 mainly due to lower trade receivables from TNB during the financial year. CFO came to RM505.4 million in FY2012 (FY2011: RM370.0 million). In line with higher CFO in FY2012, KEV’s CFO interest coverage and finance service cover ratio rose to 3.41 times and 1.34 times respectively (FY2011: 2.25 times, 1.08 times).
While payment deferrals on KEV’s RULS have helped the independent power producer to manage liquidity in the past, KEV is seeking to pay down a significant amount of its RULS by lengthening the maturity profile of its senior debt through the proposed refinancing of the BaIDS. Accrued unpaid interest on RULS owing to KEV’s shareholders increased to RM619.7 million (FY2011: RM476.5 million). The RULS are assigned full equity credit in accordance with the BaIDS’ covenant calculation methodology; its gearing ratio was 61:39 as at January 9, 2013, within covenant threshold of 80:20. MARC notes that the shareholder subordinated debt continued to exceed shareholders’ funds as of August 31, 2012.
The stable outlook on the BaIDS reflects MARC’s expectations that the KPS’ operational performance will continue to fully support its debt servicing requirements on the BaIDS, and the rating agency’s stable outlook on TNB’s senior unsecured debt rating. The rating on the BaIDS will be sensitive to negative developments in KEV’s stand-alone credit profile, a change in TNB’s rating and/or its supportive stance towards KEV.
MARC will withdraw its rating on the BaIDS following the close of the proposed transaction.
Contacts:
David Lee, +603-2082 2255/ david@marc.com.my;
Jason Kok, +603-2082 2258/ jason@marc.com.my.