Rating action    
MARC has affirmed its AA+_IS rating on Kapar Energy Ventures Sdn Bhd’s (KEV) outstanding RM690.0 million Sukuk Ijarah with a negative outlook. KEV owns and operates the Kapar Power Station (KPS), which consists of three generating facilities with a combined nominal capacity of 2,200MW.

Rationale    
The affirmed rating benefits from a two-notch support uplift from KEV’s standalone rating of AA- to reflect MARC’s expectation of a very high probability of parental support from TNB (AAA/stable), which has 60.0% ownership in KEV through its wholly-owned subsidiary TNB Power Generation Sdn Bhd (TNB Genco). TNB has demonstrated extensive operational and financial support to KEV. 

The standalone rating incorporates improvements in the operating performance of the plant’s Generating Facility 1 (GF1) and GF2 in 2020 with the unplanned outage rate (UOR) returning to the unplanned outage limit (UOL) of 6% as stipulated in the power purchase agreement (PPA). However, the ongoing elevated UOR of the plant’s GF3 remains a concern and is the premise for the negative outlook. 

Rectification works on Unit 6’s turbine at the plant’s GF3, which is required to prevent future recurrence of unplanned outages, have been deferred from August 2021 due to the prevailing movement restrictions and are now expected to be completed by end-April 2022. Moreover, the deferment also considers the shipping time for the parts to arrive from abroad before work can be completed. Notwithstanding this, the turbine issue has not resulted in any material unplanned outages since the completion of temporary rectification works in January 2020. However, a separate issue pertaining to boiler tube leakage has caused GF3’s UOR to remain high at 10.67% (2019: 10.68%). 

In 2020, KEV’s capacity payments (CP) declined to RM385.1 million (2019: RM509.4 million) mainly due to a step-down in the capacity rate financial (CRF) as well as the expiry of GF4’s PPA in December 2019. However, the UOR improvement for GF1 and GF2 contributed to lower CP reduction in 2020. KEV also received a CP reimbursement of RM70.4 million for conversion of unplanned outage in 2019 to planned outage. As a result, pre-tax losses narrowed to RM67.6 million in 2020 (2019: RM330.6 million), while cash flow from operations (CFO) turned positive, standing at RM160.0 million in 2020 (2019: negative RM24.0 million). This led to KEV’s cash balances increasing to RM449.4 million (2019: RM440.5 million) (including funds in designated accounts).

Based on KEV’s cash flow projections, KEV will be able to meet its sukuk obligations with reliance on cash balances to meet the shortfall in its CFO. In order to preserve liquidity to meet future financial obligations, KEV has fully deferred its redeemable unsecured loan stock (RULS) principal repayments and interest payments since 2019. In January 2021, KEV’s board of directors approved a proposal for an RULS redemption exercise which entails the full redemption of outstanding RULS principal amount of RM768.6 million with a fresh issuance of redeemable preference shares (RPS). The proposed exercise, which is expected to be completed by 4Q2021, would ease KEV’s future financial obligations. 

KEV’s projected minimum and average pre-distribution finance service coverage ratios (FSCR) currently stand at 1.69x and 2.18x. Our sensitivity analysis demonstrates that KEV’s FSCRs can withstand moderate stress scenarios, such as a reduction in CP of up to 3.0% p.a. before the covenanted FSCR of 1.30x is breached and up to 6.0% p.a before FSCR falls below 1.00x over the remaining six-year sukuk tenure. 

Rating trajectory

Upside scenario     
Further upgrades from the current rating are not expected in the near to medium term as operational performance and cash flow coverage are unlikely to improve significantly beyond current levels during this period. The rating outlook will be revised to stable if KEV’s mitigating plans result in improvement in plant performance and liquidity position.

Downside scenario     
The rating could face downward pressure should operating performance continue to weaken to the extent that cash buffers deplete without mitigating measures being put in place to shore up KEV’s liquidity position.