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 has developed a 2x720MW combined-cycle gas-fired power plant in Pasir Gudang, which achieved commercial operation date (COD) on January 1, 2021 for Block 1 and February 19, 2021 for Block 2.

The rating affirmation is driven by the predictable cash flows generated by the power plant that are deemed sufficient to meet financial obligations under the Sukuk Wakalah. The cash flow predictability is based on the 21-year power purchase agreement (PPA) that Southern Power has with the offtaker and key shareholder TNB (AAA/Stable) which has a combined 70% direct and indirect interest. The remaining 30% interest is held by SIPP Energy Sdn Bhd.

The CODs were delayed for six months (Block 1) and eight months (Block 2) due to the adverse operational disruption caused by the impact from the COVID-19 pandemic. Southern Power has applied for an extension of time (EOT) as per the PPA which is being assessed by TNB and a decision is expected in 3Q2021. The EOT would eliminate obligations to pay liquidated damages (LD) for the delay; however, even if it is not granted, any LD imposed would be mitigated by the terms under the EPC contract.

Total cost has remained within the planned project cost of RM4.58 billion. Funded by a debt-to-equity (DE) mix of 80:20, the equity comprises redeemable preference shares of RM906.3 million which were fully subscribed and used to refinance the junior facility in September 2020. The minimum and average pre-distribution FSCR with cash improved to 1.90x and 2.57x (2020: 1.52x and 1.87x) under base case cash flow projections due to expected excess funds given the project has not incurred material cost overruns.

To date, there have been no hitches in the plant’s operations and maintenance which is undertaken by TNB Repair and Maintenance Sdn Bhd (TNB REMACO) under a 21-year operations and maintenance agreement. TNB REMACO is a wholly owned subsidiary of TNB Power Generation Sdn Bhd.

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