MARC has affirmed the rating of Kapar Energy Ventures Sdn Bhd’s (KEV) RM3,402.0 million Bai’ Bithaman Ajil Islamic Debt Securities (BaIDS) at AA+ID and has revised the rating outlook to stable from developing. The revised outlook reflects anticipated improvement in KEV's earnings, with most operational issues of the plant being addressed as well as better electricity demand expected in 2010. The improved earnings prospects are based on expectations of higher plant availability following the resolution of significant technical issues at the generating facilities (GFs) of the multi-fuel thermal power station coupled with increased electricity demand.

KEV’s ratings are supported by its strong operational and ownership ties with the national utility company, Tenaga Nasional Berhad (TNB), on which MARC currently maintains a long-term corporate credit rating of AA+. TNB is required under the terms of the BaIDS issuance to maintain a minimum shareholding of 51% in KEV throughout the tenure of the BaIDS. The ratings are moderated by the erosion of KEV’s equity base due to its significant pre-tax loss of RM237.9 million in FY2009 and KEV’s declining cash reserves.

KEV was established to acquire the Stesen Janaelektrik Sultan Salahuddin Abdul Aziz Shah, or KPS, the largest multi-fuel thermal power station in Malaysia with a 2,420 MW nominal capacity. KPS currently operates four GFs running on coal, natural gas or oil. Distillate, a standby fuel, is also used for gas turbines as back-up. Fuel supply risk is mitigated by long-term supply agreements entered with TNB and TNB Fuel Services Sdn Bhd. All fuel costs incurred in generating electricity are passed through to TNB. Under a 25-year PPA, KEV receives payments from TNB, the plant’s offtaker, comprising monthly capacity payments (CP) and energy payments (EP). CPs are designed to cover fixed operating costs, debt service and provide returns to shareholders while EPs cover fuel costs and variable operating costs. Unplanned outages, which have to be maintained below the PPA’s stated levels to ensure full CP revenue, exceeded the required levels in FY2009. Prolonged forced outages, mainly in GF3, are reflected in lower year-on-year CP revenue in the current financial year under review. Since the month of May 2009, all GFs except GF3 are now performing close to or within the PPA requirements.

In FY2009, CP contributed 39.1% of total revenue, down by 10.1% compared to the previous period as a result of the prolonged forced outages. EP contributed 60.9% of the total revenue, down by 22.2% from the previous year due to overall reduced electricity demand. As a result, KEV recorded a loss before tax of RM237.9 million on the back of revenue of RM1,290.1 million (FY2008: RM1,570.8 million). Going forward, MARC expects KEV to record a lower loss before tax in FY2010 on the back of higher revenue, premised on all GFs being available as well as a rebound in power demand. Still, managing operational costs in FY2010 will continue to be a challenge for KEV with the improving economic conditions. MARC expects KEV to return to profitability in FY2011. As a result of higher working capital requirements as well as repayment of deferred fuel payments to TNB, MARC expects a lower cash flow from operations (CFO) and free cash flow for KEV in FY2010. CFO had risen in FY2009 to RM465.9 million due to working capital reductions. 

At the last calculation of finance service coverage ratio (FSCR) and debt-to-equity (DE) ratio on January 9, 2010, KEV registered a FSCR of 1.49 times (x) and DE ratio of 74:26 against its minimum covenanted FSCR of 1.30x and maximum DE ratio of 80:20. KEV’s outstanding Redeemable Unsecured Loan Stocks (RULS) of RM892.6 million issued to shareholders, TNB and Malakoff Corporation Berhad, has sustained KEV’s DE covenant compliance, notwithstanding the erosion in its equity base from RM209.9 million in FY2008 to RM22.4 million in FY2009. The RULS is subordinated to all KEV’s debts and any redemption is subject to the satisfaction of the distribution test.

After making the payment of the Series-10 of BaIDS amounting to RM221.7 million, the cash balance in KEV’s Designated Accounts stood at RM329.7 million, which is sufficient to cover its next payment on the July 8, 2010. The requirement to maintain a minimum amount equivalent to the next six months’ principal and profit payments (either in the Finance Payment Account or the Finance Service Reserve Account) at all times provides a buffer to cover intermittent shortfalls of cash flows from KEV’s income stream.

MARC will continue to monitor the performance of GFs of the power plant as well as KEV’s DE covenant compliance. Failure to ensure a stable performance of the GFs and maintain DE covenant compliance will exert pressure on the company’s ratings and/or outlook.

Contacts:
Khairul Emran Mahmud 03-2090 2278/ emran@marc.com.my;
Sandeep Bhattacharya 03-2090 2247/ sandeep@marc.com.my;