RAM reaffirms SPR Energy’s AA3 rating, revises outlook to negative

RAM Ratings has reaffirmed the AA3 rating of SPR Energy (M) Sdn Bhd’s (SPR or the Company) Senior Sukuk Ijarah of RM580 mil (the Sukuk) while revising the rating outlook from stable to negative. SPR is an independent power producer (IPP) that owns and operates a 100 MW combined-cycle, gas-turbine power plant in Kimanis, Sabah (the Plant). 

The negative outlook reflects our concerns that the Company’s debt-service coverage will weaken, driven by the Plant’s persistent underperformance in 2020 and the required capital expenditure (capex) to rectify the issues.

Despite the Plant’s turnaround in 2019, its unscheduled outage rate came up to 6.89% in 2020 (2019: 2.37%) against the Power Purchase Agreement’s (PPA) limit of 4%. Complications were mainly relating to ongoing issues with its heat-recovery steam generator. Consequently, SPR incurred RM7.3 mil of losses on Available Capacity Payments (ACPs), equivalent to 6% of its revenue for the year (fiscal 2019: RM3 mil or 2%).  

Pandemic-induced travel restrictions have also hampered SPR’s ability to address the technical issues, as the team responsible for major rectifications is based in China. The Plant requires an estimated RM9.2 mil to fund remedial work, which is only expected to begin in 2H 2021. As shared by the management, these works are anticipated to result in improved plant operations moving forward. On a positive note, SPR has been fully passing through its fuel expenses to its off-taker Sabah Electricity Sdn Bhd (SESB), as it has been able to meet the required heat rates under its PPA.

RAM’s stressed analysis, which incorporates potentially higher ACP losses and heftier capex, indicates that the Company’s finance service coverage ratios (FSCRs, with cash balances, post-distribution) may fall below the 1.50 times required for its current rating. We expect SPR to record a minimum FSCR of 1.31 times over the next five years, with the first dip below 1.50 times expected in July 2022. If SPR’s cashflow conforms with our sensitised projections, the rating may be downgraded several notches as its FSCRs will fall significantly below the AA3 threshold. Nonetheless, any significant upliftment of SPR’s cashflow over the next few years may result in the preservation of the Company’s debt-service coverage. 

Notwithstanding the above challenges, SPR’s business fundamentals remain underscored by the terms of its PPA, albeit stricter than those of other RAM rated IPPs. The Company is entitled to earn fixed ACPs so long as it meets its unscheduled outage limits. A smaller portion of its revenue constitutes Daily Utilisation Payments (DUPs), which are determined by the amount of electricity despatched by SESB. While this exposes SPR to some demand risk, it has mostly been receiving full DUPs. SESB is deemed a strong counterparty given the ongoing financial support from the Federal Government. Receivables from SESB have generally been promptly settled within two months of invoice receipt.

Meanwhile, the Company recorded a FSCR of 1.91 times on the most recent principal repayment date of 17 January 2021. This outperforms RAM’s projected 1.83 times, thanks to earlier-than-expected payments from SESB.  

Published on 15 June 2021

Analytical contact

Seri Nuralya Munawir

(603) 3385 2484

nuralya@ram.com.my

Media contact

Padthma Subbiah

(603) 3385 2577

padthma@ram.com.my

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Published by RAM Rating Services Berhad

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