MARC Ratings has affirmed its AA-_IS rating on Southern Power Generation Sdn Bhd’s outstanding Sukuk Wakalah of RM3.6 billion with a stable outlook.

The affirmed rating is underpinned by the strength of Southern Power’s 21-year power purchase agreement (PPA) under which demand risk is allocated to offtaker Tenaga Nasional Berhad (AAA/Stable). Capacity payments (CP) under the PPA are designed to cover fixed operating expenses, financing obligations and shareholders’ returns. Southern Power owns a 2x720MW combined-cycle gas-fired power plant in Pasir Gudang which achieved commercial operations dates on January 1, 2021 (Unit 1) and February 19, 2021 (Unit 2).

Due to teething issues in its first year of operations, Southern Power’s unplanned outage rates at Unit 1 and Unit 2 had exceeded the PPA-stipulated limit of 6%. The plant will remedy its existing issues and improve its operating performance to be in line with PPA requirements by October 2022 (Unit 1) and February 2023 (Unit 2).

As a result of the outages, CP received was 28.4% lower than the budgeted RM226.0 million. As per its entitlement under the EPC and O&M contracts, Southern Power claimed a total CP loss compensation from the EPC contractor and operator that would cover 32% of CP reduction in 2021. In terms of energy payments, Southern Power received RM1,025.8 million in 2021. It recorded a negative fuel variance of RM5.0 million due to heat rates exceeding PPA stipulations, caused by a higher number of generating unit restarts following outages to resolve its teething problems.

Cash flow from operations was lower than projected at RM76.0 million in 2021. Cash balances of RM218.5 million as at end-July 2022 are sufficient to cover its upcoming sukuk repayment of RM193.0 million in October 2022. Projected cash flows remain capable of withstanding moderate stress scenarios, including lower energy generation, higher plant outage and increased operating costs.