JIMAH EAST POWER SDN BHD - 2018

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). 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 namely TNB (70.0%), Mitsui & Co., Ltd (15.0%) and The Chugoku Electric Power Co., Ltd (15.0%).

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. The stable outlook reflects MARC’s expectation 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.

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

The overall progress of the project stood at 98.1% against the scheduled progress of 98.5% as at end-December 2018. Unit 1 achieved its initial operation date (IOD) on December 10, 2018 while Unit 2 completed the back-energisation process on November 15, 2018. MARC notes that an ongoing sweep of the plant sites has led to a total of 478 unexploded ordnances (UXOs) being documented as at December 2018. JEP and the EPC contractor had commissioned a detonation study to investigate the impact of UXO underground explosions. JEP has since requested further detonation studies to be conducted. MARC derives some comfort that exposure from UXO events are covered under the plant’s construction/erection all risks policy.

As at December 31, 2018, the project sponsors have injected a total capital of RM2.5 billion against the total expected contribution of RM2.7 billion while the project cost remains unchanged at RM11.6 billion. MARC takes comfort that project sponsors have provided an undertaking to fund project cost overruns equivalent to 2.5% of the EPC contract price. To date, RM107.0 million has been utilised for cost overruns. Going forward, additional cost overruns could arise from a delayed notice to proceed regarding ash pond works, commissioning works, and raw water pipeline works. MARC views the EPC contractors’ track record in power plant construction would support timely completion.

Additional comfort is derived from the liquidated damages (LD) provision under the EPC contract which will sufficiently address the LDs penalty under the PPA and loss of income arising from a delay in achieving the scheduled completion.

In addition, project sponsors have also provided an 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 MARC’s sensitivity analysis incorporating a three-month construction delay, cash flow generation is weakest in 2028. The timely receipt of LDs from the EPC consortium would therefore help offset any subsequent cash flow mismatch during the operational period. At the same time, MARC also believes JEP will enjoy support from the majority shareholder, TNB, to mitigate any deterioration in plant performance. MARC currently maintains a senior unsecured rating of AAA/Stable on TNB.

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.