MARC Ratings has affirmed its AA-_IS rating on Southern Power Generation Sdn Bhd’s (Southern Power) outstanding sukuk of RM3.4 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).

The affirmed rating is driven by the strength of Southern Power’s 21-year power purchase agreement (PPA) under which demand, and fuel price risks are allocated to offtaker TNB (AAA/Stable). The rating is moderated by the plant’s technical and operational issues that have impacted Southern Power’s ability to receive full capacity payments (CP) and energy payments (EP) under the PPA. 

Unplanned outage rates (UOR) improved to 10.36% (Unit 1) and 13.12% (Unit 2) as at end-June 2023 (2021: 24.03% and 32.56%) but remained significantly higher than the PPA threshold of 4.00%. An unplanned outage in Unit 2 due to an issue with its hot reheat bypass system in early June 2023 worsened its UOR to the current level from 6.90% as at end-May 2023, leading to an estimated CP deduction of RM35.2 million from projections for 1H2023. For 2022, the CP received of RM464.5 million was 14.3% lower than projected. Barring any other major unplanned outage, Southern Power expects the UORs to decline to below 4.00% by January 2024 (Unit 1) and May 2024 (Unit 2). In respect of heat rate, it remained above the PPA threshold during the review period. As a result, Southern Power did not manage to fully pass through its fuel cost.

Cash balance of RM292.0 million as at end-May 2023 is sufficient to meet the sukuk obligation of RM192.5 million in October 2023. Liquidity will be supported by liquidated damages (LD) of RM163.0 million claimed from the engineering, procurement, and construction (EPC) consortium due to the delay in COD. Of this amount, RM120.0 million is expected to be received by end-2023, and the remaining in 2024. 

Cash flow from operations (CFO) stood at RM226.3 million in 2022 with CFO interest coverage of 1.20x. Based on base case cash flow projections, minimum and average finance service coverage ratios (FSCRs) are projected at 1.32x and 1.89x throughout the sukuk tenure. A sensitivity analysis shows that cash flow coverage will remain sufficient under moderate stress scenarios of higher heat rates than PPA requirement by 2%, increase in operating expenditures by 10% and increase in UOR above PPA requirement by 2%.

The stable outlook reflects our expectation that the plant will 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 would be forthcoming.

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

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.