MARC has affirmed its AA-IS rating on Southern Power Generation Sdn Bhd’s (SPG) Sukuk Wakalah of up to RM4.0 billion with a stable outlook.
SPG is a 51:49 joint venture between Tenaga Nasional Bhd (TNB) and SIPP Energy Sdn Bhd (SIPP) and was established to develop a 2×720-megawatt (MW) combined-cycle gas-fired power plant in Pasir Gudang. Construction of the power plant is nearly complete, registering 99.7% progress as at April 25, 2020; however, its commissioning activities have been hampered by the nationwide stop-work order following the implementation of the government’s movement control order (MCO) in March 2020. Following this, the engineering, procurement and construction (EPC) contractor declared a force majeure event.
Commissioning activities are expected to resume as the government eases restrictions to allow businesses to operate. However, the scheduled commercial operation date (COD) on July 1, 2020 will be extended; under the power purchase agreement (PPA), this extension can be up to the number of days delayed by the force majeure event.
The affirmed rating incorporates MARC’s expectation that the new COD timeline will be delayed by only a few months and that this delay will not impact the projected cash flow coverage. The rating also factors in support from the shareholders for the project. MARC also notes that engineering and procurement works have achieved 100% completion, eliminating procurement risk from global supply chain disruptions due to the outbreak. Nonetheless, among the current challenges to complete the outstanding works are the travel restrictions faced by some of its EPC specialists whom are based abroad.
The risk of short-term revenue and sukuk obligation mismatch arising from the delay in achieving COD is alleviated by a liquidity buffer in the pre-funded finance service reserve account (FSRA) of RM184.5 million. The FSRA will be funded through a drawdown from its junior facility or subscription of redeemable preference shares (RPS) by its shareholders. Based on the rating base case cash flow projections, on which MARC has assumed a three-month delay in COD to October 1, 2020, the liquidity buffer will be sufficient to cover the project’s operation and financing obligations in 2020. Upon achieving COD, the predictable operational cash flow generated by the power plant is deemed adequate to meet its sukuk obligations. SPG’s average pre-distribution FSCR with cash balance throughout the sukuk tenure is projected at 1.87x.
The stable outlook is premised on expectations that the COD would be achieved within the next two quarters and that any delay impacting SPG’s financial obligations would be mitigated by the shareholders’ commitment to shore up its liquidity position.