MARC Ratings has affirmed its AA-IS rating on Southern Power Generation Sdn Bhd’s (Southern Power) outstanding sukuk of RM3.4 billion with a stable outlook.
The affirmed rating is driven by the strength of Southern Power’s 21-year power purchase agreement (PPA) under which demand, and fuel price risks are allocated to offtaker Tenaga Nasional Berhad (AAA/Stable). The rating is moderated by the plant’s technical and operational issues that have impacted Southern Power’s ability to receive full capacity payments (CP) and energy payments under the PPA.
Unplanned outage rates (UOR) improved to 10.36% (Unit 1) and 13.12% (Unit 2) as at end-June 2023 (2021: 24.03% and 32.56%) but remained significantly higher than the PPA threshold of 4.00%. An unplanned outage in Unit 2 due to an issue with its hot reheat bypass system in early June 2023 worsened its UOR to the current level from 6.90% as at end-May 2023, leading to an estimated CP deduction of RM35.2 million from projection for 1H2023. For 2022, the CP received of RM464.5 million was 14.3% lower than projected. Barring any other major unplanned outages, Southern Power expects the UORs to decline to below 4.00% by January 2024 (Unit 1) and May 2024 (Unit 2).
In respect of heat rate, it remains above the PPA threshold during the review period. As a result, Southern Power did not manage to fully pass through its fuel cost.
Cash balance of RM292.0 million as at end-May 2023 is sufficient to meet the sukuk obligation of RM192.5 million in October 2023. Liquidity will be supported by liquidated damages (LD) claimed from the EPC consortium due to the delay in commercial operation date; the LD is expected to be finalised by end-2023.
Cash flow from operations (CFO) stood at RM226.3 million in 2022 with CFO interest coverage of 1.20x. Based on base case cash flow projections, minimum and average finance service coverage ratios are projected at 1.32x and 1.89x throughout the sukuk tenure. A sensitivity analysis shows that cash flow coverage will remain sufficient under moderate stress scenarios of higher heat rates than the PPA requirement by 2%, increase in operating expenditures by 10% and increase in UOR above the PPA requirement by 2%.