Published on 09 Oct 2019.
RAM Ratings has reaffirmed the AA3/Stable rating of Edra Energy Sdn Bhd’s (EESB or the Company) Sukuk Wakalah of up to RM5.085 bil in nominal value (2018/2038) (the Sukuk). The reaffirmation is anchored by the commendable progress in the construction of the Company’s 2,242 MW combined-cycle, gas-turbine power plant in Alor Gajah, Melaka (the Plant), and our expectation that construction work will progress on schedule.
The Plant will be the largest gas-powered plant in Malaysia, utilising General Electric Company’s (GE) latest 9HA.02 gas turbine (GT). As of 29 July 2019, overall project completion came up to 76.06% - slightly ahead of the targeted 71.50%. Backed by favourable project fundamentals, EESB is expected to generate strong cashflows after the completion of the Plant, resulting in a minimum annual finance service coverage ratio of 1.52 times under our sensitised case (with cash balances, post-distribution, calculated on payment dates) throughout the tenure of the Sukuk. The Plant will consist of three single-shaft CCGT generating blocks (GBs), with a nominal capacity of 747 MW each. The Scheduled Commercial Operation Dates (SCODs) of GB 1, GB 2 and GB 3 are 1 January 2021, 1 March 2021 and 1 May 2021, respectively.
As the technology deployed for the gas turbine is untested and not yet in commercial operation globally, EESB remains exposed to technology risk. It has been reported that two of GE’s 9HA.01 GT power plants (in France and Pakistan) have experienced teething problems, with multiple forced outages. Moreover, one of its 7HA.02GT plants in the US has also been shut down following a blade failure. GE has intimated that these issues are not expected to be encountered by the Plant’s turbines. We understand that power outages are not unusual for new plants during their initial phases of operations. We further note that EESB’s turbines are the 6th, 7th and 8th units under GE’s 9HA.02 production line-up, thereby allowing some lead time for it to rectify potential technical issues before EESB starts operations. Nonetheless, our sensitivities have imputed an unscheduled outage rate (UOR) of 10% upon reaching the SCODs.
Technology risk also moderated by EESB’s Long-Term Service Agreement (LTSA) with GE, for the operation and maintenance (O&M) of the Plant’s GTs, steam turbines and generators. Furthermore, GE has provided support in respect of the insurability of the Plant, along with a special warranty. GE’s willingness and confidence in providing support, along with its more than five-decade-long operating track record, are additional positive factors. Our sensitivity analysis also assumes a 10% UOR at the end of each three-year contract-year block, as well as a 30% increase in O&M expenses after the expiry of the LTSA - under which EESB’s debt-servicing ability remains intact.
As the Plant is still under construction, the project is exposed to construction-related risks. This is, however, moderated by the lump-sum turnkey engineering, procurement and construction (EPC) contract with Hyundai Engineering Co Ltd, Hyundai Engineering & Construction Co Ltd and Hyundai Engineering Malaysia Sdn Bhd (collectively, the EPC contractors) – which provides for performance guarantees, an extended three-year defects liability period, and liquidated damages for delays.
The EPC contractors’ experience and long-established track records also provide comfort against construction risk. In addition, EESB is insured against financial loss arising from delays. Although the construction period of 40 months and contingency sum of 4.2% of the EPC cost are considered adequate, as per the independent technical & environmental adviser’s opinion, we have prudently imputed an additional cost overrun of 2.8% of the EPC cost (i.e. total contingency of 7% of the EPC cost). Even so, the Company’s debt-servicing ability is anticipated to remain intact.
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