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 is a 51:49 joint venture between Tenaga Nasional Berhad (TNB) and SIPP Energy Sdn Bhd (SIPP) and was established to develop a 2x720MW combined cycle gas-fired power plant in Pasir Gudang.
The rating affirmation reflects the steady construction progress of the power plant with no cost overrun. As at end-March 2019, the power plant project recorded actual construction progress of 82.2%, ahead by 1.0% of scheduled progress. The power plant expects to achieve scheduled commercial operation date (COD) on July 1, 2020. Upon achieving COD, the predictable operational cash flow generated by the power plant on the back of an availability-based tariff structure under a 21-year power purchase agreement (PPA) with TNB is deemed adequate to meet sukuk obligations.
The overall project cost remains unchanged at RM4.58 billion which is funded by a debt-to-equity (DE) mix of 80:20. The equity comprises ordinary share capital (RM10 million) and redeemable preference shares (RPS) (RM906.3 million). The rating is underpinned by the two-way undertaking to address any shortfall in capital contributions from either of its two shareholders. As at end-March, TNB and SIPP have subscribed to RM81.6 million in RPS. The remaining RPS subscription will be completed upon the full utilisation of sukuk proceeds. MARC also notes that RM506.3 million of the RPS proceeds will be used to repay a junior facility that will be drawn down in September 2019 to part finance the total construction costs; any unpaid junior financing obligations post-COD will be backed by the irrevocable and unconditional rolling guarantee provided by shareholders.
The completion risk is addressed by the well-experienced engineering, procurement and construction (EPC) consortium consisting of Taiwan-based CTCI Corporation and GE Energy Products France SNC. Additionally, the completion risk is moderated by the performance guarantees, warranties, and liquidated damages (LD) for any delays from its scheduled COD as well as by a contingency sum equivalent to 4.0% of the EPC costs.
The plant’s operation and maintenance (O&M) will be carried out by TNB’s wholly-owned subsidiary, TNB Repair and Maintenance Sdn Bhd under a 21-year O&M agreement. Southern Power’s average pre-distribution financial service cover ratio (FSCR) with cash balance throughout the sukuk tenure is projected at 1.94x. During the first operational period (2H2020 and 1H2021), Southern Power would need to rely on its cash buffer to meet its financing obligations as the Tier-1 capacity rate financial is 69% lower than the Tier-2 capacity rate financial (2H2021 to 1H2028).
The first sukuk principal repayment will commence in 2022. MARC notes that any payment for interest or principal of the junior facility requires Southern Power to maintain a post-distribution FSCR above 1.5x prior to the redemption of its junior facility.
Under MARC’s sensitivity analysis, the project demonstrates moderate resilience against stressed scenarios including breaches of heat rate requirements and lower plant capacity. While completion delay would heighten cash flow mismatches, LD payments from the EPC contractors would provide adequate cover for any potential loss of operational cash flow and penalty under the PPA. Consistent with its rated peers, the requirement to maintain an FSCR of 1.50x post-distribution would ensure that Southern Power exercises prudence in its liquidity management.
Contacts: Chia Kah Yie, +603-2717 2961/ kahyie@marc.com.my ; Sharidan Salleh, +603-2717 2954/sharidan@marc.com.my
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