FW: MARC AFFIRMS ITS AA+IS RATING ON KAPAR ENERGY'S RM2.0 BILLION SUKUK IJARAH; OUTLOOK REVISED TO STABLE FROM NEGATIVE

Posted date: August 15, 2017

 

MARC has affirmed its AA+IS rating on Kapar Energy Ventures Sdn Bhd's (KEV) RM2.0 billion Sukuk Ijarah and revised the rating outlook to stable from negative.

 

KEV, a 60%-owned subsidiary of Tenaga Nasional Berhad (TNB), owns and operates Kapar Power Station (KPS), the largest domestic multi-fuel thermal power station with four generating facilities (GF) with a combined nominal capacity of 2,420-megawatt (MW). The outlook revision is premised on KEV's improved cash flows and stronger liquidity position. The revision also considers the support recently extended by TNB through the implementation of periodic resetting of KPS' outage rates that has translated to an improvement in operational performance.

 

The rating affirmation incorporates a two-notch support uplift from KEV's standalone credit profile to reflect MARC's expectation of a very high probability of parental support from TNB based on its strategic shareholding in KEV and the strong operational linkage between the two entities. TNB carries a senior unsecured rating of AAA/Stable from MARC. The sukuk is secured by revenue from the sale of electricity under a 25-year power purchase agreement with TNB which expires in 2029, approximately three years after the sukuk's final redemption. The rating also considers the low fuel supply risk on the back of the long-term supply agreements with TNB Fuel Services Sdn Bhd for medium fuel oil and coal, and a new 13-year gas sale agreement with Petroliam Nasional Berhad for natural gas.

 

KPS' two generating facilities namely GF2 and GF3 had their unplanned outage rate (UOR) reset in 2016; the UOR will be reset every three years thereafter under the sixth supplemental agreement KEV entered with TNB in June 2016. The reset resulted in KPS achieving higher availability targets and an average rolling UOR below the stipulated unplanned outage limit of 6% in the financial year ended August 31, 2016 (FY2016). The FY2016 performance also benefited from recovery measures mainly targeting boiler tubes and cooling water pumps. During 1HFY2017, however, a collapsed chimney wall and pipe corrosion issues led to the decline in outage rates of GF1, GF2 and GF3. This underscores MARC's view that while resetting the rates has given KEV some reprieve, the GFs would remain susceptible to operational and technical issues given their age and design.

 

For FY2016, KEV recorded a 10.1% y-o-y increase in capacity payments (CP) and energy payments (EP) to RM614.2 million and RM1.57 billion respectively. KEV also achieved full fuel cost pass-through which also supported higher operating profit before interest and tax of RM131.7 million (FY2015: RM86.6 million). KEV's loss before tax narrowed to RM99.0 million after incurring finance costs of RM230.7 million (FY2015: negative RM198.3 million; RM284.9 million).

 

Cash flow from operations improved to RM383.4 million in FY2016 in line with higher CP and EP. The deferral of interest payments on its redeemable unsecured loan stocks had enabled KEV to preserve liquidity for its senior debt service requirements. The company's cash and cash equivalents stood higher at RM131.6 million (FY2015: RM28.9 million). As at January 6, 2017, KEV's finance-to-equity ratio based on the facility definition (facility FE) of 65:35 was within the covenanted FE ratio of no more than 80:20.

 

KEV's minimum and average pre-distribution finance service coverage ratio (FSCR) with cash balances are projected to stand at 1.41 times (x) and 1.90x respectively. The ratio is expected to decrease beginning FY2020 upon the step down in the capacity rate financial. Additionally, KEV's cash flow coverage is susceptible to UOR breaches and higher-than-projected repair and maintenance costs. Assuming continuing plant underperformance, KEV's projected liquidity position can withstand break-even scenarios of an increase in the UOR by 6% or an increase in repair and maintenance costs by 4% above the base case assumptions. Given the vulnerability of the projected cash flow, MARC expects KEV to continue to demonstrate prudence in its distribution policy if KPS' operational issues persist. As at January 6, 2017, KEV's FSCR stood at 2.34x (January 6, 2016: 2.10x).

 

Downward pressure on KEV's standalone rating and/or outlook would emerge in the event of adverse changes in TNB's rating and/or its supportive stance towards KEV. In addition, persistent operational issues at the power plant would exert pressure on the sukuk's rating.

 

 

Contacts: Adib Asilah, +603-2717 2943/asilah@marc.com.my; David Lee, +603-2717 2955/ david@marc.com.my.