The AA+ID rating accorded to Kapar Energy Ventures Sdn Bhd’s (KEV) proposed RM3,402 million Bai Bithaman Ajil Islamic Debt Securities (BaIDS) reflects the project’s stable and predictable cash flow supported by the contracted capacity payments as well as the credit strength of the off-taker cum majority shareholder, Tenaga Nasional Bhd (TNB). TNB carries an issuer rating of AA+ from MARC reflecting the utility’s near-monopolistic position in the transmission and distribution of electricity and majority government ownership.

Incorporated in 2000, KEV is a special purpose entity established to acquire the Stesen Janaelektrik Sultan Salahuddin Abdul Aziz Shah or Kapar Power Station (KPS). KEV is currently a wholly-owned subsidiary of Malakoff Berhad (MB). Pursuant to the Asset Sale Agreement (ASA) dated 31 July 2000 entered into between TNB and KEV, KEV has agreed to acquire the Assets from TNB. Prior to the acquisition of KPS, the issued and paid-up capital of KEV will be increased to RM2,500 whereby TNB and MB will own 60% and 40% of KEV respectively (“Initial Subscription”). On completion of the acquisition of KPS, the issued and paid-up capital of KEV shall be increased to RM2.0 million and the proportion of shareholding by TNB and MB shall remain unchanged at 60% and 40% respectively.

KPS, which started operations in 1985, is a multi-fuel thermal power station with 2,420 MW nominal capacity (four Generating Units), operating on three primary fuels, namely coal, natural gas and oil and a standby fuel, distillate, for the gas turbines.

KEV’s revenue is derived from the capacity and energy payments received from TNB. On average, capacity payment (CP) constitutes 48.6% of the total revenue, forming a stable stream of cashflow because under the PPA, CP is guaranteed if all the GFs maintain the average availability required. CPs are sufficient to cover KEV’s fixed operating costs, principal and interest payments. Meanwhile, energy payment (EP) is dependent on the sale of electrical energy which hinges on the demand from TNB to dispatch from this plant. EPs are designed to cover fuel costs and variable costs associated with energy production.

Fuel supply risk is mitigated on the back of the long term supply agreements entered with TNB and its subsidiary, TNB Fuel Services Sdn Bhd (TFS). Fuel is the single largest cost component and represents a pass-through cost to TNB. That aside, MARC takes comfort that KEV is a subsidiary of TNB and TNB has pledged to maintain at least 51% shareholding in KEV throughout the tenure of the BaIDS.

To ease the transfer of control from TNB to KEV, most of the current Operation & Maintenance (O&M) staff shall be seconded. The Facility Works and Rehabilitation Programme (2003-2006), KEV’s commitment to maintain the required maintenance balances in a separate account and the regular submission of technical reports prepared by the independent Technical Adviser are imposed to monitor the plant’s performance. As owner-operator of KPS, it is of the sponsors’ interest to ensure the long-term viability and efficiency of the plant.

Profitability and future cashflows are projected to be steady during the tenure of the programme driven by the contracted CP and stable operating costs. To complement the financial discipline imposed in the semi-annual redemptions, prompt payments from the offtaker, TNB as demonstrated in the payment track record minimizes short-term liquidity problems.

The cash trap mechanism present in the payment waterfall and restriction on distribution serve to minimize cashflow leakages. The requirement to maintain a minimum amount equivalent to the next six months principal and profit payments (either in Finance Payment Account or Finance Service Reserve Account) at all times also provides a buffer to cover any shortfall in operating cashflows to meet the debt obligations.