Edra Energy’s proposed RM5.28 billon sukuk (rated AA3), to fund Malaysia’s largest gas plant
KUALA LUMPUR: RAM Ratings has assigned a AA3/Stable rating to Edra Energy Sdn Bhd’s (EESB) proposed Sukuk Wakalah of up to RM5.28 billion in nominal value (2017/2037) (Proposed Sukuk).
According to RAM Ratings, the company is an independent power producer (IPP) that has signed a 21year Power Purchase Agreement (PPA) with Tenaga Nasional Bhd (TNB).
“EESB was incorporated to design, construct, own, operate and maintain the largest gas power plant in Malaysia, with a capacity of 2,242 megawatts (MW) combined-cycle, gas-turbine power plant in Alor Gajah, Melaka.
“Proceeds from the Proposed Sukuk, amounting to RM5.09 billion, will mainly be utilised to fund the construction of the plant,” the ratings firm said.
The rating reflected EESB’s strong project economics, underscored by stable cashflow generation, resulting in a minimum finance service coverage ratio of 1.5 times under RAM Ratings’ sensitised case upon completion of the Plant, commensurate with an AA3 rating.
“Given the technology used in the turbine is untested and no other plant of this scale is currently in commercial operation globally, the company is exposed to technology risk,” highlighted Chong Van Nee, RAM Ratings’ co-head of Infrastructure and Utilities Ratings.
Chong added that as the plant is under construction stage and equity will be progressively injected into the project throughout the construction period, this also exposes the project to construction related risk and uncertainty of funding.
RAM Ratings highlighted that the company is entitled to earn full available capacity payments regardless of the quantum of electricity generated, as long as it meets performance requirements under the PPA.
“EESB can also fully pass through fuel costs to TNB via energy payments received from selling electricity, provided that the plant operates within heat rates stipulated in the PPA.”
RAM Ratings derived further comfort from the sturdy credit profile of TNB.
“The technology risk associated to General Electric company’s (GE) 9HA.02-model gas turbine (GT) that can achieve an efficiency rate of over 60 per cent will be largely addressed via EESB’s LongTerm Service Agreement (LTSA) with GE for the operations and maintenance of the Plant’s GTs, steam turbines and generators.
“GE will provide further support in respect of the insurability of the plant and a special warranty to cover collateral damages. GE’s willingness and confidence in providing support is a positive, given its more than five-decade operating track record.”
That said, the company’s debt servicing ability also withstood RAM Ratings’ conservative assumptions.
This includes operational hiccups upon achieving commercial operations and at the end of each contract year block as well as higher operations and maintenance costs subsequent to the expiry of the LTSA.
“The lump-sum turnkey engineering, procurement and construction (EPC) contract signed with Hyundai Engineering Co Ltd, Hyundai Engineering & Construction Co Ltd and Hyundai Engineering Malaysia Sdn Bhd – which provides for performance guarantees, an extended defect liability period of three years and liquidated damages for delays – mitigates construction risk. The EPC contractors’ experience and long track record in the industry was also considered,” it said.
In addition, EESB will be insured against any financial loss arising from delays. Although the construction period of 40 months and contingency sum of 4.2 per cent of the EPC cost is considered adequate, as per the independent technical and environmental adviser’s opinion, RAM Ratings had prudently imputed an additional cost overrun of 2.8 per cent of the EPC cost, under which the company’s debtservicing ability is expected to hold up.
“The company’s parent, Edra Power Holdings Sdn Bhd, which is a significant power player with a sturdy business and financial profile, to some extent, allays concerns on funding uncertainty relating to progressive equity injections.”
RAM Ratings’ cashflow analysis assumes that EESB’s Finance Service Reserve Account (FSRA) will be fully funded by a standby letter of credit (SBLC), in line with EESB’s plan to fund the account upon reaching the COD.
The ratings firm expected the company to be able to consistently procure the required SBLC to fund its FSRA, failing which, the SBLC will crystallise into cash and be placed in the account.
“However, the subsequent withdrawal of the amount or failure to top up the account to achieve the minimum required balance within 120 days, would be tantamount to an event of default.
“As with other IPPs, EESB remains exposed to regulatory and single-project risks,” the ratings firm said.