MARC has affirmed its AA+IS rating on Kapar Energy Ventures Sdn Bhd’s (KEV) RM2.0 billion Sukuk Ijarah (sukuk) with a stable outlook.

Jun 26, 2014 -
MARC has affirmed its AA+IS rating on Kapar Energy Ventures Sdn Bhd’s (KEV) RM2.0 billion Sukuk Ijarah (sukuk) with a stable outlook. The affirmed rating 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 Tenaga Nasional Berhad (TNB) (rated AAA/Stable). The rating agency’s assessment of parental support takes into account TNB’s strategic stake in KEV and the strong operational ties between the two entities. The standalone credit assessment of KEV considers the satisfactory performance of its power plant and the company’s improved liquidity position following a debt refinancing exercise in 2013 which lengthened the maturity of its senior long-term debt by seven years.
KEV is the owner and operator of the Stesen Janaelektrik Sultan Salahuddin Abdul Aziz, or Kapar Power Station (KPS), the largest multi-fuel thermal power station in Malaysia with a nominal capacity of 2,420 megawatts. KPS comprises four generating facilities (GF): two GFs operate mainly on coal (GF2 and GF3) and two mainly fuelled by natural gas (GF1 and GF4). KEV’s sukuk are secured by a pledge of revenues from the operation of KPS under a 25-year power purchase agreement (PPA) with TNB. The PPA will expire approximately three years after the final repayment date of the sukuk.
KPS demonstrated a satisfactory operational performance in the latest financial year ended August 31, 2013 (FY2013) with a slightly higher capacity revenue of RM681.0 million (FY2012: RM662.2 million). Fuel cost was fully passed through to TNB via energy payments of RM2.4 billion (FY2012: RM3.0 billion). Nonetheless, operating cost pressures, particularly repair and maintenance costs, depreciation and seawater charges, impacted KEV’s profitability with pre-tax profit visibly lower at RM33.7 million (FY2012: RM65.1 million). KEV’s operating cash flow (CFO) declined sharply to RM190.1 million (FY2012: RM505.4 million) as a result of significant repayments of intercompany advances, including outstanding amounts owing to fuel supplier TNB Fuel Services Sdn Bhd. For the six-month period ended February 28, 2014 (1HFY2014), major repair works at GF3 and GF4 have contributed to higher unplanned outage rates above their maximum thresholds of 6% and 4% respectively, leading to reduction in capacity revenue reduction of about RM127 million with further reductions expected in 2HFY2014. KEV is expected to recoup part of its repair cost and revenue losses related to GF3 via insurance claims but will fund the repair cost of GF4 internally.
Despite an anticipated weaker performance for FY2014, the rating affirmation is supported by KEV’s strong liquidity comprising cash and cash equivalents of RM404.0 million and credit balance in debt reserve accounts of RM213.8 million as at end-FY2013 (FY2012: RM161.1 million; RM218.6 million). In addition, the amortisation of the sukuk ranging between RM100 million and RM200 million per annum is considered manageable. MARC expects KEV to preserve additional cash to offset the lower CFO generation in FY2014 by deferring payments on its redeemable unsecured loan stocks (RULS) if necessary.
As at August 31, 2013, KEV’s outstanding RULS of RM1.67 billion comprised cumulative interest owing to shareholders of RM775.2 million (FY2012: RM619.7 million). The rating agency notes that payments on principal and interest on the RULS are permitted subject to compliance with the covenanted finance service cover ratio (FSCR) of 1.30 times and finance to equity ratio of 80:20 which are calculated immediately after each sukuk distribution date. KEV’s FSCR, which incorporates senior debt finance service costs due over the next 12 months (including the first principal repayment of RM150 million due on July 4, 2014), stood at 3.27 times as at January 7, 2014. The finance-to-equity ratio based on the definition under the sukuk’s principal terms and conditions was also comfortably within the covenanted level at 67:33.
The stable outlook reflects MARC’s expectation of improved plant availability in the coming quarters and the rating agency’s current stable outlook on TNB’s issuer and long-term senior debt ratings of AAA. Given the parental support rating uplift, KEV’s sukuk rating is sensitive to a change in TNB’s rating and/or its supportive stance towards KEV.
Contacts:
Koh Shu Yunn, +603-2082 2243/ shuyunn@marc.com.my;
David Lee, +603-2082 2255/ david@marc.com.my.