MARC has placed its AA+ID rating on Kapar Energy Venture's (KEV) RM3,402.0 million Bai' Bithaman Ajil Islamic Debt Securities (BaIDS) on MARCWatch Negative. The rating action reflects MARC's concerns pertaining to unresolved technical issues at Kapar Power Station (KPS) which have affected its ability to consistently achieve its required availability under KEV's Power Purchase Agreement (PPA) with its offtaker, Tenaga Nasional Berhad (TNB). The reduced plant availability has resulted in decreased capacity revenue and accordingly, lower levels of cash flow and stability at KEV. MARC is concerned that KPS' continued failure to maintain acceptable rolling average unplanned outage rate (UOR) levels as defined by the PPA at three of its four generating facilities could weaken debt coverage and protection measures to levels that are weak for its rating.

Since MARC's review in September 2007, the 2,420 MW multi-fuel thermal power station has encountered intermittent as well as persistent operational challenges in the form of boiler and gas turbine issues at four of its generating facilities. The problems faced by the generating facilities have resulted in significant revenue loss, as reflected in KEV's recent financial performance. KEV recorded a 18% decline in revenue or decrease of RM331.6 million in FY2007. Pre-tax profit on a restated basis, meanwhile, plunged to RM5.6 million from RM96.9 million a year before.

For the nine months ended May 31, 2008, KEV's capacity revenue dropped to RM430.9 million from RM501.1 million for the corresponding period in 2007. KEV has maintained compliance with its minimum covenanted Financial Service Cover Ratio (FSCR) of 1.3 times based on its semi-annual FSCR of 1.6 times as of July 9, 2008. Should KEV fail to restore its revenue and payment receipts to earlier projected levels, this will put pressure on KEV to seek shareholders' support to maintain its covenanted minimum FSCR.

MARC believes that KEV's current operational problems will make its credit quality more dependent on TNB, its offtaker and 60% shareholder. TNB's obligation to maintain a minimum 51% shareholding in KEV for the tenure of the BaIDS provides some cushion against a downward movement in the rating in the near term. Apart from its supportive ownership structure, MARC derives comfort from the commitment on the part of KPS to resolve current issues.    

KEV is a special purpose entity which owns KPS, the country's largest multi fuel thermal power station. The station, strategically located in Kapar, Selangor, serves the highest base load electricity consuming areas in the country, i.e. of Klang Valley and Putrajaya.  
Apart from KEV's operational issues, MARC will also assess the implications of the recently gazetted Windfall Profit Levy (Electricity) Order 2008 in our ongoing review of the rating. MARC expects KEV to be affected by the implementation of the Windfall Profit Levy (Electricity) Order 2008 based on our preliminary assessment of their financial performance. The outcome of MARC's review and resolution of the MARCWatch Negative will depend on progress made towards addressing KEV's operational issues and/or near-term developments which could offset KEV's increased operational risk.