MARC has assigned a preliminary rating of AA+IS to Kapar Energy Ventures Sdn Bhd’s (KEV) RM2.0 billion Sukuk Ijarah (Sukuk) with a stable outlook. The Sukuk issuance will be mainly utilised to refinance the company’s existing Bai’ Bithaman Ajil Islamic Debt Securities (BaIDS) facility which currently has an outstanding amount of RM1.51 billion which is due to fully mature by 2019.

The assigned rating includes a two-notch support uplift from KEV's standalone credit assessment and fundamentally represents the very high probability of parental support from Tenaga Nasional Berhad (TNB). MARC continues to view KEV as a strategic subsidiary of TNB and maintains its view that there is a very high likelihood that TNB would provide timely capital and funding support to KEV in times of stress on account of KEV’s strong operational and ownership ties with TNB. (MARC currently maintains a senior unsecured debt rating of AAA/Stable on TNB.)

KEV was established to acquire and operate the Stesen Janaelektrik Sultan Salahuddin Abdul Aziz, or Kapar Power Station (KPS), the largest multi-fuel thermal power station in Malaysia with a nominal capacity of 2,420 megawatts (MW). KPS consists of four generating facilities (GF) capable of running on coal, natural gas or oil which were commissioned between 1985 and 2001. Distillate, a standby fuel, is also used as back-up fuel for gas turbines. KEV’s Sukuk are secured by a pledge of revenues, in the form of capacity revenues and energy payments, from the operation of the KPS under a 25-year take-or-pay power purchase agreement (PPA) with TNB.

The past operating record of KPS has been marked by higher-than-PPA threshold unplanned outages and reduced capacity revenues in certain years, which resulted in pre-tax losses in the two consecutive financial years immediately prior to the financial year ended August 31, 2011 (FY2011). KPS’ operational profile has improved significantly in the last two financial years (FY2011 and FY2012) although unplanned outages at KPS’ GF3 continue to be higher than the PPA threshold level. On a related note, MARC views positively the higher tolerance level for a failed dispatch instruction (FDI) event in the fourth supplemental agreement to the PPA, which took effect from August 2011, as this significantly lowers the risk of reduced capacity revenues stemming from FDIs.

The plant’s overall unplanned outage rate improved to 6.13% in FY2012 compared to 9.83% in FY2011. As a result of KPS’ improved availability, capacity revenue increased by 5.0% to RM662.2 million (FY2011: RM630.6 million). Revenue from energy payments were also higher by 10.7% at RM3.0 billion (FY2011: RM2.7 billion) in line with the higher dispatch level of 12,188.1 gigawatt hours (GWh), up from 11,789.9GWh in FY2011. Despite higher revenue of RM3.4 billion (FY2011: RM3.2 billion), operating costs outpaced revenue growth, resulting in a lower operating profit before interest and tax of RM354.5 million (FY2011: RM428.6 million) and lower pre-tax profit of RM65.1 million (FY2011: RM136.4 million).

The refinancing of KEV’s BaIDS via the Sukuk issuance will allow KEV to lengthen the maturity profile of its senior long-term debt by seven years. By lengthening the debt maturity profile of its senior debt, KEV is expected to have sufficient liquidity to service the interest and scheduled principal payments on its outstanding redeemable unsecured loan stocks (RULS). KEV has been servicing its BaIDS obligations from its operating cash flow (FY2012: RM505.4 million; FY2011: RM370.0 million) while deferring debt servicing on the RULS. As of August 31, 2012, the cumulative interest on RULS owing to KEV’s shareholders stood at RM619.7 million (FY2011: RM476.5 million). Based on KEV’s financial projections, the total RULS repayment during the Sukuk tenure is expected to be approximately RM1.38 billion, of which the principal repayments make up RM326.2 million, or about 36.6% of the total outstanding RULS. The base case minimum and average post-distribution finance service cover ratios (FSCR) are projected to be 1.30 times and 1.33 times respectively.

The deferral of payments on the RULS has in the past, provided KEV the ability and flexibility to preserve liquidity for its senior debt service requirements. While MARC is mindful that payments of principal on the RULS would reduce the amount of subordinated debt cushion against downside surprises in KEV’s operating performance, the rating agency notes that KEV will have to maintain a forward-looking annual FSCR of 1.30 times and a debt-to-equity (DE) ratio of not more than 80:20 throughout the tenure of the Sukuk. The aforementioned distribution test will ensure that liquidity is conserved for senior debt service requirements in the event of significant underperformance of KEV’s base case financial forecast.

The stable outlook on the Sukuk incorporates MARC’s expectations that KPS’ operational performance would remain supportive of its cash flow generation ability, and the rating agency’s stable outlook on TNB’s senior unsecured debt rating. The rating on the Sukuk will be sensitive to negative developments in KEV’s standalone credit profile, a change in TNB’s rating and/or its supportive stance towards KEV.

Contacts:
Tan Eng Keat, +603-2082 2265/ engkeat@marc.com.my;
David Lee, +603-2082 2255/ david@marc.com.my.