MARC has reaffirmed Kapar Energy Ventures Sdn Bhd’s (KEV) RM3,402 million Bai Bithaman Ajil Islamic Debt Securities (BaIDS) rating at AA+ID with a stable outlook.  The rating reflects the project’s stable and predictable cash flow supported by the contracted capacity payments as well as the credit strength of the off-taker cum majority shareholder, Tenaga Nasional Bhd (TNB). TNB carries an issuer rating of AA+ from MARC, reflecting the utility’s near-monopolistic position in the transmission and distribution of electricity, and majority government ownership.  The rating is however moderated by the operational challenges experienced by KEV’s generating facility.
 
KEV is a special purpose entity established to acquire the Stesen Janaelektrik Sultan Salahuddin Abdul Aziz Shah or Kapar Power Station (KPS). KEV’s shareholders comprise of TNB with a 60% stake, whilst Malakoff Berhad holds the remaining 40% stake. KPS is the biggest multi-fuel thermal power station with 2,420 MW nominal capacities (four Generating Facilities), operating on three primary fuels, namely coal, natural gas and oil and a standby fuel, distillate, for the gas turbines.  Fuel supply risk is mitigated by the long term supply agreements entered with TNB and its subsidiary, TNB Fuel Services Sdn Bhd (TFS). Fuel is the single largest cost component and represents a pass-through cost to TNB. MARC takes comfort that KEV is a subsidiary of TNB and TNB has pledged to maintain at least 51% shareholding in KEV throughout the tenure of the BaIDS.

The unaudited 10 months interim financial results ended 30 June 2006 reflects almost the second full year of the Stabilisation Period. During this period, revenue has increased by 5.0% to RM1,494.5 million with an operating profit of RM399.6 million, 6.4% lower than the previous corresponding period.  The capacity payment (CP) constitutes 37.2% of the total revenue, amounted to RM556.1 million, or 10% lower than CP in the last corresponding period as a result of a lower availability factor suffered by one of its generating units. 
 
For the same period, energy payment (EP) contributed 62.8% (2005: 56.6%) of the total revenue. The increase in EP was due to two factors.  One is the higher energy demand required by TNB, secondly is the higher than projected coal price.  However, the higher coal price has no impact on the KEV’s bottom line as it is a pass through cost. Operating profit margin was slightly lower due to higher operating and maintenance costs incurred during the period under review. More planned outages for preventive maintenance were carried out compared to the previous corresponding period. During the second year of stabilisation period, some technical problems still remain resulting in lower CP.  Nevertheless some comfort is derived from the ability to recover the costs of restoration / repair and business interruption from the insurance policies.  KEV has complied with its minimum FSCR and Debt-to-Equity ratio covenants of 1.3 times and 83:17 cap, respectively for the last calculation date as set out in the financial covenants.  Based on KEV’s revised 5-year projections, average FSCR is expected to be around 1.6 times.
 
Due to the high degree of complexity involved with regard to the proposed restructuring of the power industry, including the re-negotiation of the existing power purchase agreements (PPAs), changes are not expected to be immediate. Hence, MARC views that there would be no immediate or short term impact on KEV’s rating, at this juncture.  MARC however will continue to monitor the development of the restructuring proposals and to evaluate the impact on KEV.