Jimah East Power Sdn Bhd - 2014

MARC has assigned a rating of AA-IS to Jimah East Power Sdn Bhd’s (JEP) Sukuk Murabahah Programme of up to RM8.4 billion. The outlook on the rating is stable. JEP is a 70:30 joint venture between Pelita Merpati Sdn Bhd (PMSB) and 3B Power Sdn Bhd (3B Power) that was set up to finance and develop a greenfield 2x1,000MW ultra-supercritical coal-fired power plant (Project 3B or project power plant) in Negeri Sembilan. PMSB and 3B Power are subsidiaries of project sponsors 1MDB Energy Group Sdn Bhd (1MDB Energy) and by Mitsui & Co., Ltd. (Mitsui) respectively. 1MDB Energy is currently an indirect wholly-owned subsidiary of government-owned 1Malaysia Development Berhad while Mitsui is one of the largest trading houses in Japan.

The proceeds from the Sukuk Murabahah will largely fund the development, design and construction of the RM11.1 billion project power plant under a 74:26 sukuk and equity financing mix. The equity of about RM2.9 billion, which is in the form of ordinary shares and redeemable preference shares, is back-ended after the drawdown of the sukuk but before the scheduled project completion date on May 15, 2019. JEP will also procure working capital facilities of up to RM350 million, which will be maintained throughout the sukuk tenure. The sukuk will begin amortising from 2020 onwards with the final repayment in 2037, six years before the end of the 25-year power purchase agreement (PPA) with offtaker Tenaga Nasional Berhad (TNB).

The assigned rating primarily reflects JEP’s predictable cash flow streams provided by the PPA’s availability-based capacity payments as well as the pass-through of fuel and variable expenses to TNB, on which MARC currently maintains a senior unsecured debt rating of AAA/Stable. The assigned rating also incorporates the strong commitment from the project sponsors to Project 3B, the moderate construction and operation and maintenance (O&M) risks as well as low fuel supply risk. In terms of project equity contribution totalling RM2.9 billion, 1MDB Energy will procure a standby letter of credit (SBLC) from a financial institution which carries a minimum MARC rating of AA- or its equivalent prior to financial close while Mitsui has provided a corporate guarantee. The rating is, however, constrained by risks associated with the power plant design and relatively new ultra-supercritical technology as well as weaker cash flow coverage from Project 3B relative to other power plant projects in the same rating band.

The engineering, procurement and construction (EPC) contract has been awarded to a consortium chiefly comprising Japan’s IHI Corporation (IHI) and Toshiba Corporation (Toshiba), and South Korea’s Hyundai Engineering & Construction Co. Limited and Hyundai Engineering Co. Limited.  MARC notes that the fixed-price  turnkey contract  has adequate performance guarantees and an achievable construction schedule.

While construction-related risk is mostly mitigated by the experience and credit strength of the EPC consortium’s key parties, MARC observes that the track record of IHI and Toshiba in supplying boiler and steam turbine generator models in accordance with the project power plant’s specifications are somewhat limited. Nonetheless, the rating agency acknowledges the assessment from the independent technical advisor, Pöyry Energy Sdn Bhd, that any technical risk can be sufficiently addressed during the detailed design stage.

The project power plant will employ an owner-operated model with selected employees transferred from the O&M team of the existing 1,400MW Jimah Power Station located next to Project 3B. MARC draws comfort that IHI and Toshiba will provide technical assistance during the initial operational phase, and planned outage services for the boilers and steam turbine generators throughout the PPA tenure to resolve any difficulties that may arise from the power plant operations. However, given that the O&M risks are not allocated to a third party, as has been the case for similar power plant projects, JEP would need to rely on its adequate resources to meet any challenges that could arise during the operational phase. 

Under the base case financial projections, Project 3B is expected to generate minimum and average finance service cover ratios (FSCR) with cash balances of 1.73 times and 1.82 times respectively. Among the factors the base case scenario incorporates are a net plant capacity factor of 85%, heat rates that are within specified limits of the PPA as well as drawdowns under working capital facilities to bridge short-term funding gaps which in turn help to smoothen JEP’s FSCR profile under mild stress scenarios. Based on MARC’s sensitivity analysis, Project 3B’s cash flows are most susceptible to construction delays, unplanned outage limit breaches and higher-than-forecast increases in fixed costs. MARC also notes that under more severe stress scenarios, JEP would need to rely on retained cash to meet finance service, and therefore the company would have to ensure prudent liquidity management to address any potential funding gaps. In this respect, MARC expects the working capital facilities to remain as reliable sources of liquidity throughout the sukuk tenure.

Providing some uplift to JEP’s weaker cash flow protection metrics under stressed situations is the potential strong support from the project sponsors, 1MDB Energy and Mitsui. In addition to their significant strategic and financial interests in Project 3B, MARC expects support to be forthcoming given that Project 3B is the project sponsors’ first power plant development project in Malaysia. 1MDB Energy’s financial capacity to provide support will be complemented by the SBLC for its equity portion of the project. In respect of Mitsui, the rating agency maintains a positive view on the company’s high credit strength.

The stable outlook reflects MARC’s expectations of timely completion and commissioning of the project power plant within the allocated budget, as well as continued strong support from the project sponsors. Downward rating pressures could be triggered by project delays and/or construction cost overruns which would weigh on project cash flows. 

Major Rating Factors

Strengths

• Predictable cash flow stream provided by availability-based capacity payments; and
• Adequately structured project agreements.

Challenges/Risks

• Potential construction delays and cost overruns;
• Managing technology risk and owner-operated model; and
• Weak cash flow protection.