CREDIT ANALYSIS REPORT

SOUTHERN POWER GENERATION SDN BHD - 2022

Report ID 6053890046897 Popularity 73 views 26 downloads 
Report Date Sep 2022 Product  
Company / Issuer Southern Power Generation Sdn Bhd Sector Infrastructure & Utilities - Power
Price (RM)
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Rationale
Rating action     
MARC Ratings has affirmed its AA-IS rating on Southern Power Generation Sdn Bhd’s (Southern Power) outstanding Sukuk Wakalah of RM3.6 billion with a stable outlook.

Southern Power owns a 2x720MW combined-cycle gas-fired power plant in Pasir Gudang which achieved commercial operations dates (COD) on January 1, 2021 (Unit 1) and February 19, 2021 (Unit 2). It is 70% indirectly owned by Tenaga Nasional Berhad (TNB) through wholly-owned subsidiary TNB Power Generation Sdn Bhd (TPGSB) while the remaining stake is held by SIPP Energy Sdn Bhd (SIPP).

Rationale     
The affirmed rating continues to be driven by the strength of Southern Power’s 21-year power purchase agreement (PPA) under which demand risk is allocated to offtaker TNB (AAA/Stable). Capacity payments (CP) from the PPA are designed to cover fixed operating expenses, financing obligations and shareholders’ returns. The rating is moderated by risks associated with plant performance.

In its first year of operations, unplanned outage rates (UOR) of Unit 1 and Unit 2 had exceeded the PPA-stipulated limit of 6% (Unit 1: 24.03%, Unit 2: 32.56%). This has been attributed to teething issues related to the design and construction of the plant. We understand that rectification works were carried out at the cost of the engineering, procurement and construction (EPC) contractor under the existing post-construction warranty. The UOR of Unit 1 has improved to 12.53% while for Unit 2, it has stabilised at 32.06% as at end-May 2022. Barring unforeseen major outages, the UORs are expected to return to PPA limits by October 2022 (Unit 1) and February 2023 (Unit 2). As a result of the outages, CP received was 28.4% lower than the budgeted amount of RM226.0 million. 

In terms of energy payments (EP), Southern Power received RM1,025.8 million in 2021. Although the company is not affected by high fuel prices given the fuel cost pass-through mechanism under the PPA, it recorded a negative fuel variance of RM5.0 million due to higher average heat rates compared to PPA-stipulated heat rates. The higher average heat rates resulted from a higher number of restarts of the generating units following outages to resolve its teething problems. 

Southern Power has, to date, received RM14.1 million from the EPC contractor as CP loss compensation and has submitted an additional claim for approximately RM6.2 million from operator TNB Repair and Maintenance Sdn Bhd (TNB REMACO); these would cover roughly 32% of CP reductions in 2021. Further liquidity support would be derived from LD entitlements of around RM113.3 million from the EPC contractor for delays prior to achieving CODs. The final settlement amount is currently being negotiated, with inflows expected before end-2022. We note that Southern Power has already paid its portion of delay liquidated damages (LD) amounting to RM44.5 million to TNB as stipulated under the PPA in 2021.

Cash flow from operations (CFO) was lower than projected at RM76.0 million in 2021. Cash balances of RM218.5 million as at end-July 2022 are sufficient to cover its upcoming sukuk repayment of RM193.0 million in October 2022. Subsequent sukuk repayments will be sufficiently covered by CFO which is expected to increase in 2022 following higher capacity rate financial (CRF) of RM25.20/kWh/month from 2022 onwards (2021: RM7.57/kWh/month). In the event of further outages that affect Southern Power’s liquidity position to service its financial obligations, we expect support from TNB to be forthcoming.

Under the base case cash flow projections, the company’s minimum and average pre-distribution finance service coverage ratios (FSCR) with cash stand at 1.31x and 2.01x. The minimum FSCR will occur in 2022 due to the higher-than-PPA UOR assumption of 10% used. This is to account for the possibility of residual teething issues at the plant.

Rating outlook     
The stable outlook reflects our expectation that the plant will remedy its existing issues to improve its operating performance to be broadly in line with the PPA requirements or in the event of continued technical issues, support from its key shareholder to be forthcoming.

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 remains below the PPA requirements for an extended period of time, such that the company’s debt servicing ability is affected and/or support from TNB weakens.

Key strengths
Demand risk allocated to offtaker TNB
High likelihood of support from key shareholder, TNB

Key risk
Unforeseen outages exceeding PPA requirements


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