MARC has affirmed its AA_-IS rating on UiTM Solar Power Sdn Bhd’s (UiTM Solar) Green Sustainable and Responsible Investment (SRI) Sukuk of up to RM240.0 million. The rating outlook is stable. 

The affirmed rating is mainly driven by UiTM Solar’s 21-year power purchase agreement with Tenaga Nasional Berhad (TNB) under which the demand risk is largely eliminated as the national power company will purchase the energy generated by UiTM Solar’s solar photovoltaic plant (SPP), up to a certain limit, at a fixed tariff. Construction of the plant has been completed and the plant achieved its commercial operation date (COD) on April 5, 2019. The rating is moderated by the variability risk in solar irradiance and plant performance that would determine the amount of electricity generated. 

MARC observes that the actual electricity generated by the plant in the first six months of operations since COD had underperformed P90 estimates by 7.0%. This was attributed to problems associated with the gas-insulated switchgear which has since been replaced in August 2019. Following this, the plant’s energy generation surpassed its P90 estimates. MARC is of the view that UiTM Solar is unlikely to breach the performance threshold of at least 70% of the declared annual quantity (DAQ) for 2019 based on the rating agency’s breakeven analysis of the average monthly energy generated by the plant. 

Given the average plant performance ratio (PR) of 66.8% to date is also lower than the first year average PR of 77.6% guaranteed by the engineering, procurement and construction (EPC) contractors, namely ET Energy (Malaysia) Sdn Bhd (ETEM) and Northwest Electric Power Design Institute Co. Ltd (NWEPDI), any shortfall from the guaranteed PR is expected to be compensated by the EPC contractors during the two-year defects liability period.

MARC notes that the operations and maintenance (O&M) of the plant, which was undertaken by ETEM, is now being done in-house by UiTM Energy and Facilities Sdn Bhd (UiTM Energy) since October 2019 following a mutual agreement between ETEM and UITM Solar to terminate the O&M agreement. While this is a material change of event, the experienced management team employed by UiTM Energy is expected to maintain the plant at required standards.

In respect of financial performance, UiTM Solar’s cash flow and project debt coverages have weakened compared to initial projections arising from the underperformance of the P90 estimates between April 2019 and August 2019 and the 155-day delay in achieving the COD. Meanwhile, liquidated damages of RM15.0 million have been deducted from the retention sum withheld by UiTM Solar from the contractors. From this amount, RM7.75 million has been paid to TNB. Nonetheless, under MARC’s sensitised scenarios, UiTM Solar’s cash flow coverage remains moderate as the company would be able to comply with the minimum financial service cover ratio (FSCR) of 1.25x throughout the tenure of the sukuk. 

As at end-September 2019, total cash balances under the designated accounts stood at RM26.8 million (excluding RM7.0 million due to the EPC contractors and RM6.5 million profit payment paid in October 2019). Its liquidity would be sufficient to repay its combined principal repayment and profit payment of RM16.5 million which is due at end-April 2020.

The stable outlook reflects MARC’s expectation that UiTM Solar will continue to monitor and improve on the plant’s operational performance as well as generate stable income streams that are supportive of project fundamentals. Downward rating pressure could arise if the SPP continues to underperform compared to the forecast energy generation and its financial covenants are not complied with. 

Major Rating Factors

Strengths

• Healthy project fundamentals backed by PPA terms; 
• Stable cash flow generation from solar power plant operation; and
• Moderate project debt coverages.

Challenges/Risks

• Variability of solar resource; and
• Plant performance risks.