MARC has affirmed its AA-_IS rating on Southern Power Generation Sdn Bhd’s (Southern Power) Sukuk Wakalah of up to RM4.0 billion with a stable outlook. Southern Power is a 51:49 joint venture between Tenaga Nasional Berhad (TNB) and SIPP Energy Sdn Bhd (SIPP), and was established to develop a 2x720MW combined-cycle gas-fired power plant in Pasir Gudang.

The rating affirmation reflects the steady construction progress of the power plant with major construction works having been completed. The rating also reflects the project’s adequate projected cash flow coverage and strong support from shareholders. The rating is moderated by a potential delay in achieving the commercial operation date (COD) as the engineering, procurement and construction (EPC) contractor has declared a force majeure event under the EPC contract on March 21, 2020 following the movement control order (MCO) issued by the Malaysian government and restriction lockdowns in countries where the specialists supporting the project reside. Accordingly, Southern Power has also applied a force majeure relief under Clause 20.3 of the Power Purchase Agreement (PPA) with TNB. Construction could soon be restarted as the government has allowed select businesses to operate. Notwithstanding this, MARC understands that current challenges in completing outstanding works arise from travel restrictions on foreign expertise related to the project.

As at end-February 2020, the power plant project recorded actual construction progress of 99.5%. Remaining construction activities are minor works such as the construction of road pavements and drainage. MARC also notes that engineering and procurement works have achieved 100% completion, eliminating procurement risk from global supply chain disruptions due to the coronavirus disease (COVID-19) outbreak. Before the MCO, the project’s two generating units were undergoing commissioning tests and were supposed to achieve initial operation date (IOD) by March 21, 2020. Due to the force majeure, the IOD has yet to be achieved and scheduled COD is expected to be rescheduled depending on the extension of time (EOT) entitlement under the PPA.  

Risk of short-term revenue and sukuk obligation mismatch arising from the delay in COD is somewhat mitigated by a liquidity buffer from the pre-funded finance service reserve account (FSRA) of RM184.5 million. The FSRA will be funded before the scheduled COD through a drawdown from its junior facility or subscription of redeemable preference shares (RPS) by shareholders. Based on rating base case cash flow projections, on which MARC has assumed a three-month delay of the COD to October 1, 2020, the liquidity buffer will be sufficient to cover the project’s operations and financing obligations in 2020. Based on further sensitivity analysis, the project can withstand a delay of up to five months before breaching the minimum financial service cover ratio (FSCR) of 1.25x in 2022. Upon achieving COD, the predictable operational cash flow generated by the power plant on the back of an availability-based tariff structure under a 21-year PPA with TNB is deemed adequate to meet its sukuk obligations. Southern Power’s average pre-distribution FSCR with cash balance throughout the sukuk tenure is projected at 1.87x.

As at end-December 2019, the actual project cost stood at RM3.63 billion and the overall estimated project cost remained unchanged at RM4.58 billion. The project will be funded by a debt-to-equity (DE) mix of 80:20. To date, RM3.67 billion of the sukuk has been drawn down for the project. Meanwhile, the equity comprises ordinary share capital (RM10 million) and RPS (RM906.3 million). To date, TNB and SIPP have subscribed to RM81.6 million in RPS. The remaining RPS subscription will be completed upon the full utilisation of sukuk proceeds and junior facility. 

Completion risk is addressed by the well-experienced EPC consortium consisting of Taiwan-based CTCI Corporation and GE Energy Products France SNC. Additionally, the completion risk is moderated by performance guarantees, warranties, and liquidated damages (LD) for any delays from its scheduled COD (for reasons other than force majeure) as well as by a contingency sum equivalent to 4.0% of the EPC costs. 

The plant’s operations and maintenance (O&M) will be carried out by TNB’s wholly-owned subsidiary, TNB Repair and Maintenance Sdn Bhd (TNB Remaco) under a 21-year operations and maintenance agreement (OMA). Any changes to the O&M structure will have significant impact on the plant’s operational risk given the complexity of the power plant’s operations.

The stable outlook reflects MARC’s expectation of a delay in COD of not more than three months. The outlook also reflects MARC’s expectation of support from the shareholders to be forthcoming.