MARC Ratings has affirmed its AA-_IS rating on Southern Power Generation Sdn Bhd’s (Southern Power) outstanding Sukuk Wakalah of RM3.2 billion with a stable outlook.

Southern Power owns a 2x720MW combined-cycle gas-fired power plant in Pasir Gudang, Johor. The company is 70% indirectly owned by Tenaga Nasional Berhad (TNB) through its wholly-owned subsidiary TNB Power Generation Sdn Bhd while the remaining stake is held by SIPP Energy Sdn Bhd.

The affirmed rating reflects the strength of Southern Power’s 21-year power purchase agreement (PPA) with TNB (AAA/Stable) that allocates demand and fuel price risks to the offtaker, subject to plant performance meeting PPA requirements. The rating is tempered by the risk of plant underperformance curtailing revenue and Southern Power’s ability to recover energy costs.

The plant experienced minor outages that resulted in capacity payment deductions amounting to RM11.3 million which is a 4.2% reduction from the budget in 1H2024. Upon rectification, the unplanned outage rates of Unit 1 and Unit 2 fell to 2.1% and 4.0% as at end-June 2024, meeting the PPA threshold of 4.0% (end-2023: 4.5%, 8.5%). In regard to the heat rate, the plant continued to underperform the PPA target, which has precluded Southern Power from fully passing through its fuel costs. The heat rate underperformance was caused by plant shutdowns for borescope inspection, which is required by the original equipment manufacturer as a temporary mitigation measure for a design defect on a gas turbine discovered after the plant commenced operation in 2021, and issues with water steam cycle valves. The issues in Unit 1 have been fully rectified during a hot gas path inspection in August 2024, while the issues in Unit 2 will be fully rectified in January 2025.

Southern Power projects an average base case financial service coverage ratio of 1.56x with a minimum of 1.27x. Projected cash flows remain capable of withstanding moderate stress scenarios, including a 2% increase to the heat rate above the PPA limit, higher plant outage (2% above the PPA limit) and increased operating costs by 10%.

As of July 15, 2024, liquidity as reflected by cash and cash equivalents stood at RM365.8 million, sufficient to cover its upcoming sukuk profit payment and principal repayment of RM194.1 million due on October 31, 2024.