[MARC] MARC affirms rating on Kapar Energy Ventures' RM2.0 billion Sukuk Ijarah at AA+IS - 16 Jul 2019

Posted Date: July 16, 2019

MARC has affirmed its AA+IS rating on Kapar Energy Ventures Sdn Bhd's (KEV) RM2.0 billion Sukuk Ijarah with a stable outlook.

KEV is a 60.0%-owned subsidiary of Tenaga Nasional Berhad (TNB) (AAA/Stable). KEV owns and operates Kapar Power Station which has four generating facilities with a combined nominal capacity of 2,420MW. The power plant has continued to face operational challenges during the review period with one of its generating facilities exceeding the unplanned outage rates (UOR). MARC views the generating facilities would remain susceptible to operational and technical issues, arising from their age and design. Given these issues, KEV's standalone rating of AA- remains under pressure. The affirmed rating benefits from a two-notch support uplift from KEV's standalone rating to reflect MARC's expectation of a very high probability of parental support from TNB. The support assumption is based on the current strategic shareholding of TNB in KEV and the strong operational linkages between both entities. MARC also highlights that the ongoing electricity industry reform could potentially impact TNB's business and financial profiles and correspondingly its ability to support its subsidiaries including KEV. In this regard, if there are changes in TNB's rating or its supporting stance, KEV's rating could be lowered.

In 2018, KEV's capacity payments of RM626.0 million were lower than the budgeted RM682.4 million, attributed mainly to the breach in the UOR. The capacity payment is expected to decline by 31.8% in 2020 due to a step-down in the capacity rate financial in 2020 as stipulated in the Power Purchase Agreement (PPA). MARC also notes that one of the generating facilities will be decommissioned in July 2019, although this will not have a significant impact on KEV's financial performance due to its smaller plant capacity.

During the period under review, KEV's energy payments were higher at RM1.95 billion on the back of higher fuel cost. In 2018, the heat rate of all generating facilities was within the specified threshold. Cash flow from operations (CFO) was higher at RM493.9 million while cash and cash equivalents stood at RM455.0 million, sufficient to meet its next sukuk repayment of RM100.0 million and redeemable unsecured loan stocks of RM50.0 million in 2020.

KEV's financial projections show minimum and average pre-distribution finance service cover ratios (FSCR) of 1.54x and 1.89x for the remaining sukuk tenure. KEV needs to maintain an FSCR of at least 1.30x for each year. The sensitivity analysis demonstrates KEV's susceptibility to a decline in capacity revenue, UOR degradation and an increase in capex compared to an increase in repair and maintenance costs. MARC also notes the sukuk repayment risk is mitigated to certain extent as the PPA expires in 2029, approximately three years after the sukuk's final redemption in 2026.

Contacts:
Chia Kah Yie, +603-2717 2961/ kahyie@marc.com.my
Wan Abdul Muiz Wan Abdul Ghafar, +603-2717 2939 / muiz@marc.com.my
Sharidan Salleh, +603-2717 2954/ sharidan@marc.com.my