Kapar Energy Ventures Sdn Bhd - 2008 / 2009

MARC has affirmed the rating of Kapar Energy Ventures Sdn Bhd’s (KEV) RM3,402.0 million Bai’ Bithaman Ajil Islamic Debt Securities (BaIDS) at AA+ID. The rating now carries a developing outlook. Concurrently, MARC has removed the rating from MARCWatch Negative where it had been placed since July 2008 on concerns linked to the unresolved technical issues at Kapar Power Station (KPS) which had led to reduced power plant availability. 

The affirmed rating principally reflects KEV’s strong operational and ownership ties with Tenaga Nasional Berhad (TNB), moderated by reduced power plant availability which has affected both revenue and profit levels. TNB, the national electric utility company, is rated AA+ by MARC. Under a 25-year Power Purchase Agreement (PPA), KEV receives payments from TNB, the plant’s offtaker, comprising a monthly capacity payment (CP) which is the amount paid per capacity made available, and energy payment (EP) which is the sale of electrical energy determined by the net energy output delivered to TNB. CP is designed to cover fixed operating costs, debt service and provides a return to shareholders. KEV is currently 60% owned by TNB, and it is required under the terms of the BaIDS issuance that TNB’s shareholding cannot go below 51% throughout the tenure of the BaIDS. Additionally, TNB recently announced its intention to acquire the remaining 40% of KEV, held by Malakoff Corporation Berhad.

KEV was established to acquire the Stesen Janaelektrik Sultan Salahuddin Abdul Aziz Shah or KPS, the largest multi-fuel thermal power station in Malaysia with a 2,420 MW nominal capacity. KPS currently operates four generating facilities (GFs) using three types of fuel, namely coal, natural gas and oil. Standby fuel, distillate, is also used for gas turbines for back-up purposes. Fuel supply risk is mitigated by long-term supply agreements entered with TNB and its wholly-owned subsidiary, TNB Fuel Services Sdn Bhd. All fuel costs incurred in generating electricity are passed through to TNB.

Under the PPA, the unplanned outage rate (UOR) is one of the determinants of KEV’s CP revenue, which must be maintained below the PPA’s stated levels to ensure full CP revenue. Technical issues affecting the performance of the GFs have caused the UOR to exceed the required levels. This is reflected in lower year-on-year CP revenue in the financial year ended August 31, 2008 (FY2008). Rectification work on the GFs which was completed after the second half of the financial year has brought three out of four GFs closer to performing within the PPA requirements. The rectification work on GF3 is scheduled to be undertaken sometime in May 2009 during the planned shutdown period. Failure to meet PPA requirements on GF3’s UOR will affect CP revenue in FY2009.

For FY2008, KEV recorded a slight increase in revenue to RM1,570.8 million but a 14.8% decline in gross profit mainly on account of higher expenses incurred for repair and maintenance of the GFs. CP contributed 35.7% of total revenue, a reduction of 11.6% from the previous year due to reduced power plant availability. EP contributed 64.3% of total revenue, an increase of 17.9% from the previous year on the back of higher fuel payment. Increases in coal and gas prices during the year were mitigated by the pass-through fuel cost mechanism under the PPA. KEV complied with its minimum finance service coverage ratio (FSCR) and Debt-to-Equity (DE) ratio covenants of 1.3 times (x) and 80:20 cap, by registering FSCR of 1.63x and DE ratio of 72:28 respectively at the last calculation date on January 8, 2009. The cash balance in the Designated Accounts totalled RM346.1 million on January 9, 2009, a day after KEV made profit and principal payments for series 8 of the BaIDS amounting to RM216.5 million.

Meanwhile, TNB has posted a net loss of RM940.7 million for the three-month period ended November 30, 2008, owing to weak electricity demand, higher coal prices and foreign exchange losses which arose as a result of the weakening Ringgit against the Yen and USD. Apart from foreign exchange losses, the capacity charges paid to independent power producers in respect of the country’s surplus generation capacity continues to weigh on TNB’s profitability. MARC believes that the foregoing will remain drivers of continued earnings weakness in 2009. The utility’s short term liquidity remains strong, relative to its commitments. TNB’s credit profile continues to be an important factor in KEV’s rating in light of the consideration given to KEV’s ownership structure and support from TNB.

The developing outlook on the rating reflects lowered earnings expectations for KEV on account of lower expected CP revenue and also for TNB as a result of continued weak electricity demand. The outlook also incorporates operational uncertainty which TNB will face arising from the government’s decision to review electricity tariffs in 2009.

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