MARC Ratings has affirmed its AA+IS rating on Kapar Energy Ventures Sdn Bhd’s (KEV) outstanding RM580.0 million Sukuk Ijarah and concurrently revised the outlook to stable from negative.
The outlook revision reflects the improvement in KEV’s cash flow protection following better operational metrics recorded by its 2,200MW power plant. Over the last two years, the negative trend of unplanned outage rates (UOR) at the power plant’s three generating facilities (GF) has been reversed. The reversal was partly supported by outage conversions, with the UOR reset to zero at the start of KEV’s sixth contract year block (2022-2024). This has provided additional outage headroom for the plant, though we note that there were no major outages during 1H2022.
The rating affirmation continues to factor in our expectations of a high probability of parental support from Tenaga Nasional Berhad (TNB) (AAA/stable), reflected in a two-notch uplift from KEV’s standalone rating of AA-. Continued support is evidenced by the subscription of redeemable preference shares issued on July 1, 2022, to fully redeem KEV’s outstanding redeemable unsecured loan stocks (RULS) principal of RM768.6 million, as well as the conversion of unplanned outage to planned outage by TNB.
The foregoing improvement in operational performance has resulted in variances between actual and budgeted capacity payments (CP) narrowing substantially in the last two years (2020: RM31.6 million, 2021: RM35.8 million) compared to 2019 (RM82.6 million). In 1H2022, KEV received full CP.
We note that KEV has managed to resolve the majority of technical issues encountered, with the exception being damaged turbine blades at GF3’s second unit (Unit 6). Permanent rectification work to restore the unit’s capacity is expected to be carried out in September 2023; in the meantime, the unit will continue operating at a lower capacity and incur marginal CP reductions of around RM3.0 million p.a.
KEV was also able to fully pass through its fuel costs in 1H2022 and 2021, and recorded pre-tax profit of RM59.5 million in 2021 compared to pre-tax loss of RM67.6 million in 2020. In line with the earnings improvement, cash flow from operations increased to RM275.3 million (2020: RM160.0 million). KEV’s designated accounts balances stood at RM281.5 million as at end-July 2022, more than sufficient to meet its upcoming semi-annual sukuk profit obligation of RM15.0 million in January 2023.
Based on 2022-2026 financial projections, the minimum and average distribution finance service coverage ratios (FSCR) stand at 2.45x and 2.86x, higher than the previous review’s 1.69x and 2.18x due to higher liquidity and absence of RULS interest payments. KEV will be able to maintain FSCRs above the covenanted 1.30x under moderate stress scenarios in our sensitivity analysis.