JIMAH EAST POWER SDN BHD - 2017

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.

The affirmed rating incorporates predictable project cash flows, a manageable repayment profile that matches JEP’s availability-based revenue structure under the power purchase agreement (PPA) and the credit strength of project sponsors Tenaga Nasional Berhad (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. The rating agency also notes adequate contract arrangements against pre- and post-commissioning risks.

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 PPA with TNB. The scheduled commercial operation date (COD) of unit 1 is on June 15, 2019 while unit 2’s is on December 15, 2019. The engineering, procurement and construction (EPC) consortium undertaking the lump sum turnkey contract consists of Japan’s IHI Corporation (IHI) and Toshiba Corporation (Toshiba); South Korea’s Hyundai Engineering & Construction Co. Limited (Hyundai E&C) and Hyundai Engineering Co. Limited (Hyundai Engineering); Ishi Power Sdn Bhd (Ishi Power) and TOS Energy Malaysia Sdn Bhd (TOS Energy).

In July 2017, Toshiba underwent a corporate restructuring which resulted in the creation of four separate business entities. All of the group’s existing domestic and international power generation projects are now under the purview of Toshiba Energy Systems & Solutions Corporation (TESSC). In line with this new development, Toshiba has confirmed the novation of its scope of works under the EPC contract to TESSC. MARC welcomes the fact that Toshiba’s existing project management team for JEP has been retained by TESSC. A corporate guarantee letter, which is a crucial prerequisite for the consent of other EPC consortium members and JEP towards the novation, is expected to be finalised by end-1Q2018.

Notwithstanding this, the overall project construction progress is deemed satisfactory as actual plant construction progress is at 67.68% against a planned progress of 66.05%. MARC, however, notes that the transmission works and lines are behind schedule due to delays in the civil ground improvement works and land acquisition process. MARC is of the view that the solid track record of the EPC contractors in power plant construction would support a timely completion. 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 the scheduled completion.

As at August 31, 2017, the project sponsors have provided a total capital of RM1.7 billion against the total expected contribution of RM2.7 billion to achieve the scheduled project completion by end-2019 while project costs have marginally increased to RM11.63 billion. MARC takes comfort that project sponsors have provided a supplemental undertaking to fund project cost overruns equivalent to 2.5% of the EPC contract price. In addition, project sponsors will also provide exchange supplemental capital contribution to cover project cost overruns due to variances in exchange rates from the assumed base rates during the construction period. Such an undertaking is exercisable only if the Sukuk Murabahah and the project sponsors’ capital contribution are fully exhausted and insufficient to meet the project costs. To further mitigate foreign exchange risk, JEP has also entered into short-term forward contracts to manage its exposure to the US dollar and Japanese yen.

Under the base case cash flow projection, JEP is expected to achieve minimum and average finance service cover ratios (FSCR) with cash balances of 1.25 times and 1.33 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 the 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 (TNB Remaco). 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 due to a delay in the 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.

Major Rating Factors

Strengths

• Strong financial profile of project sponsors;
• 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
• Tight cash flow coverage affords low margin for plant underperformance.