MARC Ratings has affirmed its AA+_IS rating on Kapar Energy Ventures Sdn Bhd’s (KEV) outstanding RM470.0 million Sukuk Ijarah with a stable outlook. KEV owns and operates the Kapar Power Station (KPS), comprising three generating facilities (GF) with a combined nominal capacity of 2,200MW.

The affirmed rating benefits from a two-notch uplift from KEV’s standalone rating of AA- due to potential support from Tenaga Nasional Berhad (TNB) (AAA/stable), which has 60.0% ownership of KEV through its wholly-owned subsidiary TNB Power Generation Sdn Bhd (TPGSB). TNB has demonstrated extensive operational and financial support to KEV, including through the subscription of redeemable preference shares (RPS) issued in 2022, to help fully redeem its outstanding redeemable unsecured loan stocks (RULS). The rating is moderated by persistent technical issues afflicting the ageing GFs.

In February 2023, the plant’s GF3 experienced boiler tube leakage that resulted in its unplanned outage rate (UOR) becoming higher than the unplanned outage limit (UOL) of 6.00% as set in KEV’s Power Purchase Agreement (PPA). The issue was fully rectified in the following month. For this reason, RM11.2 million was deducted from its capacity payments (CP) in 1H2023; MARC Ratings views this as manageable. For GF1 and GF2, the UORs have continuously remained below the UOL during the review period. During 2022, UORs at all GFs were within the UOL. As a result, KEV received full CP of RM440.3 million during the year. 

In 1H2023, KEV recorded a loss of RM357.7 million from the negative variance between applicable coal price (ACP) (used to calculate energy payments (EP)) compared to the average coal cost, as a result of falling coal prices in 1H2023. However, since June 2023, coal prices have stabilised at close to pre-pandemic levels, moderating concerns on any material price variance in 2H2023.

KEV’s pre-tax profit increased to RM390.2 million in 2022 (2021: RM59.5 million) on the back of higher revenue of RM4.3 billion (2021: RM1.4 billion), which in turn was attributable to higher EP. Cash flow from operations (CFO) turned negative due to a large increase in pending receivables related to the EP, but subsequently improved in 1H2023 as outstanding EP were received. As at July 4, 2023, cash in designated accounts stood at RM391.7 million which is sufficient to meet the next profit payment and principal repayment amounting to RM173.0 million in 2024.

Based on the base case cash flow projections, cash flow coverage will remain sufficient through the maturity of the sukuk in 2026 with the minimum and average financial service coverage ratios (FSCRs) standing at 1.89x and 2.21x. The FSCRs can withstand moderate stress scenarios of increases in operating and capital expenditures by 10% and 15% respectively, reduction of CP by 6% and reduction of EP by 3%. 

The stable outlook assumes KEV’s plant performance to be broadly in line with projections to generate sufficient cash flows to meet its financial obligations, and support from TNB to continue to be forthcoming.

Further upgrade from the current rating is unlikely given continued operational issues faced by the plant due to its ageing GFs. 

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