SP PowerAssets Ltd.

The WACC of 5.76% from the previous regulatory period has been extended to fiscal 2021 as the regulator together with SPPA's parent, Singapore Power Ltd. (SingPower), and its ultimate shareholder, Temasek Holdings (Private) Ltd., work on a holistic review of the WACC framework. Following the outcome of the final WACC, we expect SPPA will likely enter into new interest rate swaps or financing arrangements to minimize any mismatches between the actual cost of debt and the regulatory approved cost of debt. The weakness in fiscal 2021 is primarily due to SingPower deferring price increases for the electricity and gas networks, amounting to Singapore dollar (S$) 346 million (including S$303 million at SPPA), in support of the government's measures following the

...Tariff reset will moderate metrics, but SP PowerAssets Ltd. (SPPA) has headroom to withstand a lower anticipated WACC from April 2021 for the remaining regulatory years ending March 2025. We estimate SPPA's ratio of funds from operations (FFO) to debt to remain at about 16% over the next two fiscal years ending March 2022 (fiscal 2022) from 19% in fiscal 2020 due to the likely drop in the WACC, which we expect to be about 5%, given the lower interest rates environment. However, the actual impact will depend on the parameters of the final WACC decision expected by March 2021. The final WACC decision would provide cash flow visibility for the remaining four years in the current regulatory period. We believe this will continue to support SPPA's metrics at levels appropriate for its current ratings, even if the WACC falls to 3.2%, which we believe is unlikely. This is because Singapore's power regulatory framework has been robust and stable, providing assured returns based on the WACC. The...

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