[RAM] RAM Ratings affirms Edra Energy's AA3/Stable sukuk rating

RAM Ratings has affirmed the AA3/Stable rating of Edra Energy Sdn Bhd’s (the Company) Sukuk Wakalah of up to RM5.085 bil in nominal value (2018/2038). 
 
The affirmation is premised on Edra Energy’s steady projected cashflow generation, which was bolstered by a better-than-expected operating performance in its first year of operations. This is despite lingering fleet-wide defects following the completion of its 2,242 MW combined-cycle gas turbine power plant in Alor Gajah, Melaka (the Plant). The rating also considers explicit credit support from Edra Energy’s sole owner, Edra Power Holdings Sdn Bhd (Edra Power, rated AA1/Stable by RAM), detailed in a letter of undertaking (LoU). This commitment ensures sufficient liquidity to maintain the Company’s annual finance service coverage ratio (FSCR) at a minimum of 1.50 times, which is pivotal to maintaining the AA3 rating.

The strength of Edra Energy’s 21-year power purchase agreement (PPA) with the offtaker, Tenaga Nasional Berhad (TNB, rated AAA/Stable), underscores its sturdy business profile. In 2022 and through 7M 2023, the Plant was eligible for full available capacity payments after meeting the PPA’s unscheduled outage rate limits. Edra Energy also effectively passed on fuel costs to TNB on meeting the stipulated heat rate requirements. However, the Plant’s availability factor slightly lagged industry peers due to extended scheduled outages to rectify the fleet-wide defects, potentially resulting in sizeable penalties payable in 2024. These issues (including recovery of the potential revenue loss) are being addressed in accordance with the equipment manufacturer General Electric (GE)’s recommended action plan, without incurring additional costs for the Company. 

Given the early stages of the GE 9HA.02 gas turbine’s operation, we do not discount further hiccups. Edra Energy, however, 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 making available critical and strategic spares in a timely manner until the end of the 36-month warranty period.

Moving forward, Edra Energy expects higher capital expenditure for parts procurement in view of adverse foreign exchange rates and increased inspection frequency. We have also assumed a longer forced outage duration, zero fuel margin, an availability target penalty and consequently lower cashflow generation under our sensitised cashflow projection. Considering these factors, Edra Energy may require periodic liquidity assistance from Edra Power under RAM’s sensitivities, amounting to RM1.22 bil from 2024 and 2034, to sustain projected FSCRs of above 1.50 times. The Company, however, does not anticipate any liquidity injection from its shareholder in its base case as there is headroom to distribute RM1.86 bil in cumulative dividends from 2024 to 2038. 

The Plant commenced full commercial operations on 28 February 2022, missing the initial scheduled commercial operation date of 1 May 2021 due to extended pandemic-related disruptions and initial operational issues. Liquidated damages for delayed commercial operations were fully settled with proceeds received from the engineering, procurement, construction, and commissioning consortium.

As of end-July 2023, Edra Power’s liquidity position remained robust with untapped credit facilities of RM95 mil and USD245 mil, alongside RM1.52 bil in unencumbered cash reserves. This ensures timely support for Edra Energy as per the LoU. Edra Power’s balance sheet shows strong company-level and consolidated gearing ratios of 0.01 times and 0.67 times, respectively.

In the near term, Edra Energy is anticipated to comfortably fulfil upcoming sukuk obligations, holding RM770.17 mil in cash as at end-July 2023 against RM478.35 mil in financial obligations within the next 12 months. Sukuk profit and principal obligations of RM215 mil due in January 2024 are currently secured by a combination of cash balances in the Finance Service Reserve Account (FSRA) and FSRA Standby Letter of Credit procured by Edra Power for the same amount.


Analytical contacts
Zachary Tan
(603) 3385 2612
zachary@ram.com.my

Chong Van Nee, CFA
(603) 3385 2482
vannee@ram.com.my

Media contact
Sakinah Arifin
(603) 3385 2500
sakinah@ram.com.my