MARC Ratings has affirmed its AA+_IS rating on Kapar Energy Ventures Sdn Bhd’s (KEV) outstanding RM320.0 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 due to expected 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 redeem KEV’s outstanding redeemable unsecured loan stocks (RULS). The rating is moderated by persistent technical issues afflicting the ageing GFs.

In January 2024, KPS’ GF3 experienced several minor technical issues with its circuit breaker, draught system and condenser; outage for rectification works resulted in its unplanned outage rate (UOR) increasing to 9.64% in January 2024 (December 2023: 8.24%). With no major outage recorded afterwards, UOR reduced to 7.74% as at end-March 2024. As a result of the outage, capacity payments (CP) of RM96.0 million in 1Q2024 were 10% lower than budgeted. In 2023, CP also came in below budget (-7%), affected by outages at GF3 due to a boiler tube leakage, as well as water pump and condenser-related issues. For GF1 and GF2, the UORs remained below the power purchase agreement’s (PPA) unplanned outage limit (UOL) of 6.00%.

KEV was not able to fully pass through its fuel costs in 1Q2024 and 2023 mainly due to a decline in coal prices. In 2023, the company recorded a loss of RM324.9 million from the negative variance between energy payments (EP) receipts and coal costs. As coal prices have stabilised in 1H2024, a narrower negative variance is expected for the full year.

Following the negative fuel variance in 2023, KEV registered pre-tax loss of RM392.7 million in fiscal 2023 (2022: pre-tax profit of RM390.2 million). Notwithstanding this, KEV returned to positive cash flow from operations (CFO) generation (+RM53.3 million), supported by collection of outstanding EP receivables from 2022. As at July 6, 2024, overall cash balances (including the amount in the finance service reserve account (FSRA)) stood at RM269.5 million after KEV made its scheduled profit payment and principal repayment amounting to RM161.4 million.

Under the base case forecast, cash flow coverage is expected to remain adequate throughout the remaining tenure of the sukuk (final maturity in 2026), with the financial service coverage ratio (FSCR) projected at 1.74x in 2024 and 1.61x in 2025. The FSCR can withstand moderate stress scenarios, such as 10% and 15% increases in opex and capex, as well as varying degrees of CP and EP reductions.

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 TNB’s continued support to KEV.

Further upgrade from the current rating is unlikely considering the persistent 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 and/or should TNB’s support weaken.