CREDIT ANALYSIS REPORT

SOUTHERN POWER GENERATION SDN BHD - 2021

Report ID 605389004 Popularity 127 views 25 downloads 
Report Date Jun 2021 Product  
Company / Issuer Southern Power Generation Sdn Bhd Sector Infrastructure & Utilities - Power
Price (RM)
Normal: RM500.00        
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Rationale
Rating action     
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 was established to develop a 2x720MW combined-cycle gas-fired power plant in Pasir Gudang. It is 70% directly and indirectly owned by Tenaga Nasional Berhad (TNB) while the remaining is held by SIPP Energy Sdn Bhd (SIPP).

Rationale     
The rating affirmation is driven by the predictable cash flows generated by the power plant that are deemed sufficient to meet financial obligations under the Sukuk Wakalah. The cash flow predictability is underpinned by the 21-year power purchase agreement (PPA) that Southern Power has with the offtaker and key shareholder TNB (AAA/Stable). The rating is moderated by risks associated with plant performance. 

The plant achieved commercial operation date (COD) for Block 1 on January 1, 2021 and for Block 2 on February 19, 2021. The CODs were delayed for six months (Block 1) and eight months (Block 2) due to the adverse impact from the COVID-19 pandemic. Southern Power has applied for an extension of time (EOT) as per the PPA which is now being assessed by TNB. We understand that a decision is expected in 3Q2021. While the EOT would eliminate any obligation to pay delay liquidated damages (LD), even if it is not granted, any LD imposed would be mitigated by the terms under the engineering, procurement and construction (EPC) contract.

The total cost has remained within the planned project cost of RM4.58 billion. Funded by a debt-to-equity (DE) mix of 80:20, the equity comprises redeemable preference shares (RPS) of RM906.3 million which were fully subscribed and used to refinance junior facility in September 2020. The minimum and average pre-distribution finance service cover ratio (FSCR) with cash improved to 1.90x and 2.57x (2020: 1.52x and 1.87x) under base case cash flow projections due to expected excess funds given that the project has not incurred material cost overruns.

To date, there has been no hitches in the plant’s operations and maintenance (O&M) which is undertaken by TNB Repair and Maintenance Sdn Bhd (TNB REMACO) under a 21-year operations and maintenance agreement (OMA). TNB REMACO is a wholly-owned subsidiary of TNB Power Generation Sdn Bhd (TNB Genco). While the technology of gas turbine GE 9HA.02 is new, TNB REMACO has experience of operating the first generation turbine (GE 9HA.01) since 2018, thereby mitigating operational risk. 

Rating outlook     
The stable outlook reflects MARC’s expectation that the plant’s operating performance will be broadly in line with the PPA requirements. 

Rating trajectory

Upside scenario     
Any upgrade will hinge on consistently achieving good operating performance that translates to higher-than-projected debt service coverage.

Downside scenario     
The rating could come under pressure if the plant’s operational performance falls below the PPA requirements over a period of time such that the company’s debt servicing ability would be affected.

Key strengths
  • Predictable cash flow stream underpinned by the power purchase agreement with TNB
  • Strong support from shareholders 
Key risk
  • Plant performance 



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