RAM Ratings reaffirms Edra Energy’s AA3/Stable sukuk rating

Published on 17 Dec 2021.

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RAM Ratings has reaffirmed the rating of Edra Energy Sdn Bhd’s (the Company) Sukuk Wakalah of up to RM5.085 bil in nominal value (2018/2038). 
The reaffirmation is anchored on our view that Edra Energy has sufficient liquidity to weather further delays in the completion of its 2,242 MW combined-cycle, gas turbine power plant in Alor Gajah, Melaka (the Plant or the Project) - comprising three generating blocks (GBs)). This is premised on a letter of undertaking (LoU) from Edra Power Holdings Sdn Bhd (rated AA1/Stable by RAM) – Edra Energy’s immediate and sole holding company – to irrevocably and unconditionally provide liquidity support to the Company as and when required to preserve its finance service coverage ratio (FSCR) at a minimum 1.50 times, commensurate with the AA3 rating.

The engineering, procurement, construction and commissioning (EPCC) contractors for the Project – Hyundai Engineering Co Ltd, Hyundai Engineering & Construction Co Ltd and Hyundai Engineering Malaysia Sdn Bhd – revised the completion timeline several times due to capacity restrictions imposed during the height of the pandemic as well as three key teething issues discovered during commissioning. As of 16 December 2021, the identified issues had been addressed and the first GB (Unit 1) has achieved Commercial Operations Date (COD) while the remaining two GBs had resumed commissioning, the final process prior to starting commercial operations. Edra Energy has intimated that the Plant is on track to meeting the EPCC contractors’ latest COD targets for the other two GBs of 15 January 2022 (Unit 2) and 1 March 2022 (Unit 3). 

While no cost overruns are to be expected, Edra Energy’s recently signed EPCC supplemental agreement will address the rectification of the offshore intake cooling water culvert defects. The supplemental agreement includes the implementation of temporary rectification works and a long-term solution at the EPCC contractors’ cost. 

Under our sensitised scenario, however, we have assumed further completion delays – an additional one to two months for the remaining two GBs – to cater for unforeseen circumstances. As the Project involves fixed financial obligations, the additional delay will cause a cashflow mismatch, creating a larger cumulative liquidity gap of approximately RM480 mil under this scenario. We expect Edra Power to bridge the gap, as agreed in the LoU, to maintain a minimum annual FSCR of 1.50 times (with cash balances, post-distribution, calculated on payment dates) throughout the tenure of the Sukuk. No additional liquidity injection is required under management’s base case expectations.

As at end-July 2021, Edra Power and its group of subsidiaries had RM1.13 bil of unencumbered cash, any repatriation of which would require advance planning. This coupled with RM250 mil of undrawn credit facilities (including a USD42 mil revolving facility to be in place by end-December 2021), sufficiently covers the expected shortfall – the first of which is anticipated in July 2022 based on our sensitised case.

Tenaga Nasional Berhad (TNB), Edra Energy’s sole off-taker, is closely monitoring the progress of the Plant and will review the extended Scheduled Commercial Operation Date (SCOD) under the Power Purchase Agreement (PPA) when the COD of each GB is reached. Liquidated damages (LDs) payable to TNB under the PPA for delays beyond the SCOD will be contractually borne by the EPCC contractors unless the latter can show that the delay is caused by a force majeure event, as specified in the EPCC contract. As the delivery of the Plant is undertaken by the EPCC contractors on a full-wrap and turnkey basis, LDs for delay that are payable to TNB is expected to be passed on to the former.

Looking ahead, we do not discount the possibility of further operational hiccups from the use of new technology for a plant of this scale. We have accounted for this by assuming a longer forced outage duration and consequently lower cashflow generation under our sensitised cashflow projection. Edra Energy would be able to rely on its Long-Term Service Agreement with GE Global Parts & Products GmbH (the equipment supplier) which provides guarantees on output, heat rates, planned and unplanned outages. The latter also commits to make available critical and strategic spares in a timely manner until the end of the 36-month warranty period.

Analytical contacts
Jack Kwan
(603) 3385 2532

Chong Van Nee, CFA
(603) 3385 2482

The credit rating is not a recommendation to purchase, sell or hold a security, inasmuch as it does not comment on the security’s market price or its suitability for a particular investor, nor does it involve any audit by RAM Ratings. The credit rating also does not reflect the legality and enforceability of financial obligations.

RAM Ratings receives compensation for its rating services, normally paid by the issuers of such securities or the rated entity, and sometimes third parties participating in marketing the securities, insurers, guarantors, other obligors, underwriters, etc. The receipt of this compensation has no influence on RAM Ratings’ credit opinions or other analytical processes. In all instances, RAM Ratings is committed to preserving the objectivity, integrity and independence of its ratings. Rating fees are communicated to clients prior to the issuance of rating opinions. While RAM Ratings reserves the right to disseminate the ratings, it receives no payment for doing so, except for subscriptions to its publications.

Similarly, the disclaimers above also apply to RAM Ratings’ credit-related analyses and commentaries, where relevant.

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