Posted Date: September 26, 2018
MARC has affirmed its rating of AA+IS on Kapar Energy Ventures Sdn Bhd's (KEV) RM2.0 billion Sukuk Ijarah with a stable outlook. KEV is a 60.0%-owned subsidiary of Tenaga Nasional Berhad (TNB) which owns and operates Kapar Power Station (KPS), the largest domestic multi-fuel thermal power station. KPS has four generating facilities (GF) with a combined nominal capacity of 2,420 megawatts (MW).
The affirmed rating incorporates a two-notch support uplift from KEV's standalone rating premised on MARC's assessment of a very high probability of parental support from TNB. The assessment is based on TNB's strategic interest in KEV and the strong operational linkage between both 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 (PPA) with TNB which expires in 2029, approximately three years after the sukuk's final redemption in 2026.
The rating also considers the low fuel supply risk on the back of long-term supply agreements with TNB Fuel Services Sdn Bhd for coal and medium fuel oil, and gas sale agreement with Petroliam Nasional Berhad (PETRONAS) for natural gas. Downward pressure on KEV's standalone rating would emerge if there are changes in TNB's rating and/or its supportive stance towards KEV. In addition, persistent operational issues at the power plant would also exert pressure on the rating.
During financial year ended August 31, 2017 (FY2017), all the four GFs breached their respective unplanned outage limits (UOL). Cracks on the inner wall of flue-gas stacks and boiler tube leaks led to an increase in the outage rates. The power plant had its unplanned outage rate (UOR) reset in June 2016 and thus registered a lower average rolling UOR in FY2016. This underscores MARC's earlier assertion 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.
During FY2017, KEV recorded an increase in both capacity payments (CP) and energy payments (EP). CP marginally increased by 1.0% to RM620.5 million as KEV benefitted from the reset of the UOR. The 16.3% y-o-y increase in EP to RM1,828.7 million is mainly due to higher fuel prices despite having generated a lower amount of electricity in FY2017. Coupled with higher other operating income, KEV's operating profit before interest and tax (OPBIT) stood higher at RM234.9 million (FY2016: RM131.7 million). This has led to KEV's first pre-tax profit since FY2013.
Cash flow from operations declined 29.3% y-o-y to RM271.1 million on the back of an increase in intercompany and inventory balances. With a higher repayment of borrowings and interest expenses, cash and deposits stood lower at RM299.8 million. The amount in KEV's finance service reserve account is sufficient to service its next profit payment and principal payment of RM200.0 million in July 2019. For the remaining sukuk tenure, KEV's financial projections show minimum and average pre-distribution finance service cover ratios (FSCR) of 1.54 times (x) and 1.91x. Sensitivity analysis demonstrates KEV's susceptibility to a decline in capacity revenue and UOR degradation compared to an increase in capital expenditure as well as repair and maintenance costs.
During the period under review, the terms of the redeemable unsecured loan stocks (RULS) were renegotiated. Effective December 2017, the RULS bear an annual interest of 8.0% compared to the previous 15.0% while unpaid interest will no longer attract compounding interest. This led to a derecognition of RM636.7 million of outstanding RULS which was treated as additional capital contribution to the company's shareholders' equity. With the improvement in KEV's equity base to RM573.2 million, its leverage ratio improved to 4.67x. The treatment of KEV's RULS as equity under the sukuk facility has sustained KEV's leverage covenant compliance. As at January 8, 2018, KEV's facility-to-equity ratio stood at 50:50, which is well below the covenanted ratio of 80:20.
The deferral of payments on the RULS has in the past provided KEV with the ability and flexibility to preserve liquidity for its senior debt service requirements. As of end-August 2017, the outstanding RULS owing to KEV's shareholders stood at RM1,268.1 million. While principal payments on the RULS would reduce the subordinated debt cushion against downside surprises in KEV's operating performance, the rating agency notes that KEV will have to maintain a forward-looking annual FSCR of 1.30x and a debt-to-equity ratio of not more than 80:20 throughout the tenure of the Sukuk. The aforementioned distribution test will ensure that liquidity is conserved for senior debt service requirements in the event of a significant underperformance of KEV's base case financial forecast.
Lim Chi Ching, +603-2717 2963/ firstname.lastname@example.org;
David Lee, +603-2717 2955/ email@example.com.