MARC has affirmed its rating of AA-IS on Jimah East Power Sdn Bhd’s (JEP) outstanding RM8.98 billion Sukuk Murabahah with a stable outlook.
JEP was established to develop, design, construct and operate a 2x1,000-megawatt (MW) ultra-supercritical coal-fired power plant in Jimah, Negeri Sembilan under a 25-year power purchase agreement (PPA) with Tenaga Nasional Berhad (TNB). As at August 31, 2016, the power plant project recorded actual construction progress of 22.34%, slightly behind the planned progress of 24.23%.
The affirmed rating incorporates predictable project cash flows, a manageable repayment profile that matches JEP’s availability-based revenue structure under the PPA and the credit strength of project sponsors TNB (70%), Mitsui & Co., Ltd (Mitsui) (15%) and The Chugoku Electric Power Co., Ltd (Chugoku) (15%). The rating is moderated by risks associated with ultra-supercritical technology as well as completion and construction cost overrun risks.
As at July 31, 2016, the project sponsors have provided total capital of RM618.7 million against total expected contribution of RM2,632.4 million to achieve scheduled project completion by end-2019. MARC notes that the overall project cost has been revised upward to RM11,634.6 million from the original budget of RM11,612.4 million on anticipation of an increase in engineering, procurement and construction (EPC) costs on the Japanese yen contract portion. This is due to the ringgit weakening against the Japanese yen. The revised project cost remains within the 2.5% cost overrun coverage provided by the sponsors, whose key obligations also include the injection of supplemental capital to cover any cost overruns arising from variances in exchange rates from the assumed base rates during the construction period. To further mitigate foreign exchange risk, JEP has also entered short-term forward contracts to manage its exposure to the US dollar and Japanese yen.
The rating agency notes adequate contract arrangements against pre- and post-commissioning risks and the sufficient progress made on the construction of the power plant. The slight delay is attributed to progress slippage at the interconnection facility which in turn was the result of a delay in design and engineering approval from TNB’s transmission division. Nonetheless, the scheduled completion date of December 15, 2019 has remained unchanged as the progress slippage is at a non-critical portion of the project based on the opinion of the independent technical and environment advisor Pöyry Energy Sdn Bhd. The rating agency is of the view that the solid track record of the EPC contractors in power plant construction would support timely completion. The EPC consortium undertaking the lump sum turnkey contract consists of Japan’s IHI Corporation (IHI) and Toshiba Corporation (Toshiba), and South Korea’s Hyundai Engineering & Construction Co. Limited and Hyundai Engineering Co. Limited. Additional comfort is also derived from the liquidated damages (LD) provision under the EPC contract which will sufficiently address the LD penalty under the PPA and loss of income arising from a delay in achieving scheduled completion.
Under base case cash flow projection, JEP is expected to achieve minimum and average finance service cover ratios (FSCR) with cash balances of 1.58 times and 1.77 times respectively during the sukuk tenure. MARC’s sensitivity analysis demonstrates that the project FSCR would remain above the covenanted level of 1.25 times in event of a six-month project completion delay or mild-to-moderate performance breaches. The rating agency views the likelihood of a persistent unplanned outage as low given the participation of IHI and Toshiba as technical support providers to plant operator TNB Repair and Maintenance Sdn Bhd. Operations and maintenance (O&M) risk is further addressed by the LD provisions under the O&M agreement that would partially cover the loss of income in the event of performance breaches. Mitigating potential cash flow mismatch risk during the initial operating period as a result of a delay in commencement of plant operations are the timely receipt of LD from the EPC contractor and pre-commission insurance claims.
The stable outlook reflects MARC’s expectations that JEP will continue to deliver satisfactory construction progress on the project power plant within the allocated budget and the project sponsors will inject the capital requirement as per the financing structure in a timely manner.
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Contacts: Ng Chun Kean, +603-2082 2230/ chunkean@marc.com.my; David Lee, +603-2082 2255/ david@marc.com.my.
[This announcement is available in the MARC corporate homepage at http://www.marc.com.my ]
---- DISCLAIMER ----
This communication is provided by Malaysian Rating Corporation Berhad (MARC) on the basis of information believed by MARC to be accurate and reliable as derived from publicly available sources or provided by the rated entity or its agents. MARC, however, has not independently verified such information and makes no representation as to the accuracy or completeness of such information. Any assignment of a credit rating by MARC is solely to be construed as a statement of its opinion and not a statement of fact. A credit rating is not a recommendation to buy, sell, or hold any security.
© 2016 Malaysian Rating Corporation Berhad
© Press Release 2016
