MARC Ratings has affirmed its AA-_IS rating on Jimah East Power Sdn Bhd’s (JEP) outstanding RM8.50 billion Sukuk Murabahah with a stable outlook. 

The rating affirmation reflects JEP’s predictable cash flows from its 2x1,000-MW ultra-supercritical coal plant under a 25-year power purchase agreement (PPA) with Tenaga Nasional Berhad (TNB). The rating also reflects the operational and financial linkages with TNB, which has an indirect 70% stake in JEP, and the credit strength of the project sponsors, namely TNB, Mitsui & Co., Ltd (Mitsui) (15.0%) and The Chugoku Electric Power Co., Inc (Chugoku) (15.0%). The rating is moderated by operational issues at the plant that have impacted JEP’s ability to receive full capacity payments (CP) and energy payments (EP).

Unit 1’s unplanned outage rate (UOR) remained elevated at 13.1% in June 2023, higher than the PPA’s unplanned outage limit 2 (UOL2) of 8.0%. In May 2023, a trip at Unit 1’s submerged chain conveyor resulted in 18 days of outage and two days of deration, leading to JEP receiving 6.7% lower CP than budgeted in 1H2023. However, this has since been rectified, with the faulty component replaced. In 2022, CP came 8.6% lower than budgeted due to boiler tube leaks. The rating agency understands that the company has scheduled a major planned shutdown for Unit 1 in March 2024 to, inter alia, address this boiler tube leakage issue. Rectification cost will be borne by the engineering, procurement and construction (EPC) contractor under its post-construction warranty. Meanwhile, the UOR at Unit 2 has remained within the PPA limit since the start of its commercial operation. In January 2024, the UOR at both units will be reset to 0% as JEP enters its second block year (2024-2028). This will provide the units with outage headroom. 

JEP recorded a loss of RM70.3 million in 1H2023 from the negative fuel variance between the applicable coal price (ACP), (used for the calculation of EP) and the average coal cost following the fall in coal prices since early 2023. JEP was also not able to fully pass through its fuel costs to TNB as the plant recorded heat rates above the PPA requirement due to low-quality coal. In this regard, JEP is working closely with supplier TNB Fuel Services Sdn Bhd for procurement of better-quality coal.

We note that the coal stockpile at JEP’s plant has been below the PPA requirement since March 2023 due to (1) low calorific value (CV) coal necessitating additional consumption of coal to generate per unit of electricity output; (2) longstanding defect issues (claimable under warranty) at JEP’s continuous ship unloading (CSU) units; and (3) high electricity dispatch instruction from Single Buyer. This led to the issuance of an Event of Default (EOD) letter from TNB on June 23, 2023, after the expiry of the initial 90-day remedy period given to the company. The remedy period has now been extended to December 18, 2023. We understand that the stockpile level has reached 321,000 MT in October 2023 compared to about 130,000 MT in June 2023. JEP is currently working on mitigation measures to restore the stockpile level to the PPA minimum requirement and avoid future recurrence. JEP expects to meet the minimum stockpile requirement by April 2024 and has requested for a further extension of the remedy period to May 11, 2024, pending approvals from Single Buyer and the Energy Commission. 

In 1Q2023, cash flow from operations (CFO) improved to RM367.5 million following receipt of outstanding EP receivables from 2022. Debt-to-equity (DE) ratio increased to 3.23x as at end-March 2023 due to redemption of RM80 million of redeemable preference shares (RPS) in January 2023. 

JEP maintains its liquidity position with cash and bank balances of RM791.3 million as at end-September 2023, sufficient to cover its upcoming profit payment and principal repayment of RM392.3 million due in December 2023. Minimum and average pre-distribution finance service coverage ratios (FSCR) with cash are projected at 1.43x and 1.61x. JEP’s cash flow can withstand moderate stresses to heat rate (additional 2% degradation) and outage rate (higher by 2%) throughout the sukuk tenure. 

The stable outlook reflects our expectation that JEP’s plant performance will be broadly in line with projections and that it will maintain sufficient liquidity buffers to meet its financial obligations.

A rating upgrade is unlikely in the near to medium term as operational performance and cash flow coverage are not anticipated to improve significantly from current levels. A rating upgrade may be considered if the plant can demonstrate steady operating performance on a sustained basis, leading to stronger liquidity position and debt service coverage.

The rating could face downward pressure should operating performance weaken to the extent that cash buffers are depleted without mitigating measures being put in place to shore up JEP’s liquidity position.