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 the predictable cash flows from the power plant, a manageable repayment profile that matches JEP’s availability-based revenue structure under the PPA, the operational and financial linkages with TNB which has a 70%-stake in JEP, and the credit strength of project sponsors, namely TNB (70.0%), Mitsui & Co., Ltd (Mitsui) (15.0%) and The Chugoku Electric Power Co., Inc (Chugoku) (15.0%). The rating is moderated by risks associated with ultra-supercritical technology and the complexity of power plant operations.  

The power plant achieved full commercial operation date (COD) on August 22, 2019 (Unit 1) and December 27, 2019 (Unit 2), following a 68-day and 12-day delay from the original scheduled COD (SCOD). The delay in Unit 1 was due to some rectification works for a turbine following the discovery of severe rubbing occurrence on high-pressure parts pursuant to the testing and commissioning works as well as malfunction of a low-pressure turbine bypass valve. These issues caused the plant’s higher heat rate of 8,997kJ/kWh during a heat rate test conducted in May 2019, above the guaranteed heat rate of 8,909kJ/kWh. JEP subsequently undertook replacements, polishing and machining on the damaged parts. Upon rectification and remedial action works, the plant’s heat rate significantly improved to 8,914kJ/kWh in the second performance test conducted in August 2019. The plant continued to operate well within PPA heat rate requirements for the operational period between August 2019 to December 2019.   

The delay in Unit 2 was largely attributed to design flaws in the insulator steel, leading to overheated ground wire. JEP has replaced the ground wire entirely with a larger diameter wire capable of withstanding larger currents. Additionally, it has undertaken replacement of steel fixing rods and affected insulators, insertion of insulation washers and installation of a dry air feed system to mitigate the issue. MARC understands that JEP is entitled to claim total liquidated damages (LD) payments amounting to RM145.4 million and RM27.6 million from the engineering, procurement and construction (EPC) contractor attributed to the COD delay for Unit 1 and Unit 2. JEP has received RM131.4 billion for Unit 1 while LD payments for Unit 2 remain  outstanding as at end-December 2019. The LD provision under the EPC contract  provides

sufficient cushion to address the LD penalty under the PPA amounting to RM48.0 million and loss of income arising from a delay in achieving the scheduled completion for both units. JEP’s project expenditure stood at RM11.36 billion as at end-December 2019, below the budgeted amount of RM11.63 billion. 

Post-construction risk is mainly mitigated through warranties provided by the EPC consortium for the generating units, interconnection facilities and metering equipment. The warranty period will extend for 24 months from the COD of the relevant unit. JEP has also contracted TNB Remaco, an experienced operations and maintenance (O&M) provider, to operate and maintain the power plant under an O&M agreement (OMA). TNB Remaco will guarantee that the operating performance of the project power plant will be within the parameters as set forth in the PPA, provided that the project power plant passes the performance test and meets the capacity, efficiency and emissions requirements as per the EPC contract. TNB Remaco will be subjected to LD if the power plant performance is lower than the given parameters.

JEP’s finance service ability remains adequate as JEP’s minimum and average finance service cover ratios (FSCR) stand at 1.57x and 1.81x under base case projections, comfortably above the covenanted FSCR level of 1.25x. JEP’s project revenue in the form of availability payments and energy payments (EP) should still provide sufficient cash flow coverage going forward, subject to the plant meeting the PPA’s threshold requirements. 

The stable outlook is premised on JEP’s plant operating performance achieving PPA requirements. Downward rating pressure could arise if the plant’s operational performance deteriorates significantly, which would affect its debt-servicing ability.

MARC does not expect the ongoing COVID-19 global pandemic to have a significant impact on JEP’s credit profile. This is premised on the fact that electricity falls under essential services in the Federal Government Gazette, allowing the plant to continue operations as usual. All demand risk is borne by TNB whereby in the event of no dispatch, JEP continues to receive capacity payments (CP) from TNB as long as it meets the availability requirements stipulated under the PPA.