MARC has assigned a preliminary rating of MARC has affirmed the AA-_-IS to Southern Power Generation Sdn Bhd’s (Southern Power) proposed Sukuk Wakalah of up to RM4.0 billion. The outlook on the rating is stable. Southern Power, a 51:49 joint venture between Tenaga Nasional Berhad (TNB) and SIPP Energy Sdn Bhd, will utilise proceeds from the sukuk to develop a 2x720-megawatt combined cycle gas-fired plant in Pasir Gudang, Johor.

The rating reflects Southern Power’s predictable operational cash flow on the back of the availability-based tariff structure under a 21-year power purchase agreement (PPA) with TNB, on which MARC has a senior unsecured debt rating of AAA/Stable. The absence of demand and fuel price risks offered by the PPA, supports the project fundamentals. The rating also considers the strong commitment from Southern Power’s shareholders, through a two-way undertaking to address any shortfall in capital contributions from either shareholder.

The estimated total project cost of up to RM4.6 billion will be funded by a debt-to-equity mix of 80:20. A major portion of the equity injection will be partially met by a junior facility of up to RM610 million to be set up closer to the sukuk issuance date. While all outstanding junior financing is expected to be repaid at the commercial operation date (COD) through proceeds from a redeemable preference shares (RPS) subscription, any unpaid junior financing obligations after scheduled COD will be backed by a rolling guarantee provided by the shareholders. In addition, TNB has provided a covenant to maintain at least 51% direct or indirect interest in Southern Power throughout the sukuk tenure.

Constraining the rating are risks associated with the project’s construction and completion. Southern Power has awarded the power plant development to an experienced consortium led by Taiwan-based CTCI Corporation (CTCI) and General Electric Energy Products France SNC (GE). The project will be built under a fixed sum engineering, procurement and construction (EPC) contract with guarantees of performance, warranties, liquidated damages (LD) for any delays and a contingency sum equivalent to 4% of the EPC cost. Southern Power has secured an arrangement to fully hedge its US dollar exposure prior to the sukuk issuance. MARC opines that the involvement of the original equipment manufacturer GE under the EPC arrangement as crucial to minimise problems related to technical and plant design. Coupled with CTCI’s experience in Malaysian power plant construction, the implementation and execution risks of the project are largely mitigated.

During operations, Southern Power will receive capacity payments to cover its fixed operating expenses, financing obligations and shareholders’ returns, all of which are subject to an unplanned outage rate of below 4% and a contracted average availability target of at least 94%. A key concern surrounding the project is the short operational track record of the 9HA gas turbines. In this regard, an independent technical advisor has assessed and opined that the operations and maintenance (O&M) risk mitigation measures for the project are adequate considering the availability of O&M performance guarantees and the long-term service agreement with the original gas turbine supplier. The plant will be operated by TNB’s wholly-owned subsidiary, TNB Repair and Maintenance Sdn Bhd under a 21-year O&M agreement (OMA).

Southern Power’s average post-distribution financial service cover ratio (FSCR) with cash balance throughout the sukuk tenure is expected to stand at 1.90 times. The project’s ability to meet the projected FSCRs, however, is conditional upon a successful upward revision of the capacity rate financial prior to the issuance of the sukuk. The projections also assume that Southern Power will fully redeem its outstanding junior financing through proceeds from the RPS subscription at the COD. Under MARC’s sensitivity analysis, the project demonstrates resilience against moderate stressed scenarios. The risk of a severe plant underperformance is mitigated by the OMA’s LD provisions as well as insurance protection. The project is also covered by LD payments from the EPC contractor which provide adequate protection for the potential loss of operational cash flow and delay penalty under the PPA. Consistent with its rated peers, the requirement to maintain an FSCR of 1.50 times post-distribution ensures that Southern Power would exercise prudence in its liquidity management particularly in the period of plant underperformance.

The stable outlook reflects MARC’s expectations that construction will progress on schedule and stay within the allocated budget. The outlook is also based on the assumptions that Southern Power will receive the required approval for the PPA tariff revision and the project coverage will be maintained at current levels following such revision.

Contacts:
Adib Asilah, +603-2717 2943/ asilah@marc.com.my;
David Lee, +603-2717 2955/ david@marc.com.my.