MARC AFFIRMS ITS AA+IS RATING ON KAPAR ENERGY VENTURES SDN BHD’S RM2.0 BILLION SUKUK IJARAH

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 uplift from KEV’s standalone rating of AA- premised on MARC’s continued assessment of a very high probability of support from majority shareholder Tenaga Nasional Berhad (TNB). The rating agency’s assessment is underpinned by TNB’s strategic interest in KEV and the strong financial and operational linkages between the two entities. TNB has a AAA/Stable rating from MARC. The sukuk is secured by a pledge of KEV’s operational revenues derived from the 25-year power purchase agreement with TNB, expiring in 2029. 

KEV is the owner and operator of the largest domestic multi-fuel thermal power station, Stesen Janaelektrik Sultan Salahuddin Abdul Aziz (Kapar Power Station (KPS)), with a nominal capacity of 2,420 megawatts. Its standalone rating considers adequate cash flow coverage metrics that are consistent with projections, notwithstanding the weaker operating performance for financial year ended August 31, 2014 (FY2014) which was mainly due to capacity revenue loss of RM134.3 million. This was a result of an extended unscheduled outage at one of KEV’s four generating facilities (GF), namely GF3, between December 2013 and August 2014, which led to a pre-tax loss of RM147.3 million on revenue of RM2.05 billion in FY2014 (FY2013: pre-tax profit of RM33.7 million; revenue of RM2.87 billion). Despite weaker operating cash flow (CFO) of RM180.5 million (FY2013: RM190.1 million), KEV’s sizeable opening cash and cash equivalents of RM404.0 million has enabled the company to meet its sukuk obligations of RM238.1 million in FY2014.

For FY2015, MARC expects a high likelihood of earnings recovery to levels prior to the outage incident based on the turnaround in the operating performance and anticipated insurance reimbursements. As at end-1HFY2015, GF3’s rolling unplanned outage rate reduced to 34.6% (end-FY2014: 45.4%) while KEV’s capacity revenue rose to RM293.0 million (1HFY2014: RM224.6 million). The company has received RM70.0 million of the total insurance claims of RM240.0 million. In FY2014, KEV made a payment of RM101.0 million on its redeemable unsecured loan stocks (RULS), meeting a distribution test that includes a minimum forward-looking post-distribution finance service cover ratio (FSCR) of 1.30 times (x) and a maximum finance-to-equity (FE) ratio of 80:20. As at January 6, 2015, KEV’s FSCR stood at 1.95x, in line with the projected FSCR of 1.93x for FY2014. The FE ratio, which considers KEV’s outstanding RULS of RM1.64 billion as at August 31, 2014 (FY2013: RM1.67 billion) as part of equity, was within the covenanted level at 67:33. Currently, the outstanding sukuk stands at RM1.85 billion.

The stable outlook reflects MARC’s expectations of an overall improvement in the operational performance of KPS over the next 12 to 18 months and the rating agency’s stable outlook on TNB’s issuer and long-term senior debt ratings of AAA. Any changes in TNB’s rating and/or its supportive stance towards KEV and material deviations in KEV’s standalone cash flow coverage metrics from projections will exert pressure on the sukuk rating.

Contacts: Koh Shu Yunn, +603-2082 2243/ shuyunn@marc.com.my; David Lee, +603-2082 2255/ david@marc.com.my.

June 26, 2015