View Credit Analysis Report (60576)

SubcategoryInfrastructure & Utilities - Power
Date Article2020-08-04 00:00:00
MARC has affirmed its AA+IS rating on Kapar Energy Ventures Sdn Bhd’s (KEV) RM2.0 billion Sukuk Ijarah. The rating outlook has been revised to negative from stable.

KEV owns and operates the Kapar Power Station (KPS), which consists of three generating facilities with a combined nominal capacity of 2,200MW. KEV’s fourth generating facility was decommissioned at end-2019. 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 Tenaga Nasional Berhad (TNB) (AAA/stable), which has 60.0% ownership in KEV. Malakoff Corporation Berhad (Malakoff) holds the remaining 40.0%.

The outlook revision reflects KEV’s continued weakening plant operating performance in 2019 with three of the plant’s generating facilities reporting unplanned outage rates (UOR) exceeding the power purchase agreement (PPA) requirements. The operational problems have heightened the risk on cash flow protection that has already been pressured by the step-down in the capacity rate financial (CRF) from July 2019 onwards.

As a result of the high UOR, KEV’s capacity payments (CP) declined to RM509.4 million from RM626.0 million in the previous year. The unplanned outages also caused a decline in net electricity dispatch from the plant, resulting in a reduction in energy payments (EP) received. EP stood at RM1,719.2 million in 2019 compared to RM1,978.5 million in 2018. KEV registered higher pre-tax losses of RM330.6 million (2018: pre-tax losses of RM37.5 million), while cash flow from operations stood at negative RM24.3 million.

KEV’s operating performance in 2019 was largely affected by technical issues in Generating Facility 3, which experienced turbine blade dislodgement at Unit 6. KEV has installed turbine pressure plates as a temporary rectification measure for the turbine blade dislodgement. After completing installation in January 2020, Unit 6 has been operating at a capacity of 440MW, lower than its tested annual available capacity (TAAC) of 470MW. Generating Facility 3’s rolling UOR has also subsequently improved to 8.27% as at end-April 2020 (2019: 10.68%). 

As a long-term solution, KEV plans to spend RM71.0 million in capex for turbine blade replacement and rotor replacement at Units 5 and 6 in October 2020 and August 2021. KEV expects the works to restore Unit 6’s TAAC back to 470MW as per its original capability. MARC is of the view that in order to preserve liquidity to meet KEV’s senior financial obligations, it can opt to defer its redeemable unsecured loan stock (RULS) repayments to TNB and Malakoff. KEV has exercised this option in the past and fully deferred its RULS principal repayment and interest payment of RM321.5 million in 2019.

The rating agency’s sensitivity analysis demonstrates that, assuming deferment of all RULS repayments until after the sukuk tenure, KEV’s pre-distribution finance service coverage ratio (FSCR) can withstand mild stress scenarios such as a reduction in CP of up to 2.0% p.a. before breaching the covenanted level of 1.30x in 2025.

MARC will continue to monitor the performance of the generating facilities. The rating could be lowered if operating performance continues to weaken such that cash buffers are reduced without mitigating measures being put in place to shore up KEV’s liquidity position. Conversely, the rating outlook will be revised to stable should KEV’s mitigation plans result in an improvement in plant performance and liquidity position.

Major Rating Factors

Strong support from majority shareholder Tenaga Nasional Berhad; 
Sizeable cash balances; and
Protective debt covenant.

Poor operational performance due to technical issues; and
Weaker cash flow coverage after step-down in capacity rate financial 
        in July 2019.

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