RANHILL POWERTRON II SDN BHD - 2017

MARC has affirmed its ratings on Ranhill Powertron II Sdn Bhd’s (RPII) RM240 million outstanding Islamic Medium-Term Notes (IMTN) and RM350 million outstanding guaranteed IMTN at AA_IS and AAA_IS(fg) respectively. The outlook on the ratings is stable.

RPII is an 80%-owned subsidiary of Ranhill Capital Sdn Bhd (Ranhill Capital) and was established to build, own and operate Rugading Power Station, a 190-megawatt (MW) combined-cycle gas turbine (CCGT) power plant in Sabah, under a 21-year power purchase agreement (PPA). The rating on the guaranteed IMTN reflects the unconditional and irrevocable Kafalah guarantee provided by financial guarantee insurer Danajamin Nasional Berhad (Danajamin) on which MARC has an insurer financial strength rating of AAA/Stable.

The rating on the IMTN incorporates RPII’s sufficient projected cash flow coverages underpinned by the favourable terms of RPII’s PPA with offtaker, Sabah Electricity Sdn Bhd (SESB). The PPA transfers demand and fuel price risk to the offtaker. The rating is also supported by RPII’s sound plant operating performance in meeting PPA requirements in relation to the plant’s availability, heat rate and unscheduled outage rate. Moderating these strengths are the excess capacity situation in Sabah as well as RPII’s expected higher reliance on cash buffers upon a step-down in the Tier-2 capacity rate financial (CRF) beginning 2023.

RPII achieved an average availability target of 95.3% in its second contract year block of 2014 - 2016 against the contracted average availability target (CAAT) requirement of 94% under the PPA. For 2016, RPII received capacity payments (CP) of RM96.7 million which were in line with the budget. However, energy payments (EP) of RM92.0 million were 13.1% below the budget owing to the plant operating at a low load factor of 67.8% as Sabah’s power supply continued to outpace demand. In addition, as the oversupply occurs at night when demand is low, RPII has been operating only one generating unit at night, which has led to an average start-stop frequency of about five times per month.

The low load factor, coupled with the strengthening of the US dollar during the period, have affected RPII’s profit margin as the operations and maintenance (O&M) are fixed under a 21-year contractual service agreement (CSA) with General Electric Company (GE). While RPII has been able to fully pass through its natural gas and distillate costs to SESB, a twofold increase in maintenance cost of RM8.5 million (2015: RM3.6 million) weakened RPII’s profitability in 2016. The cost was incurred as the plant underwent major maintenance for both gas turbines. Operating profit before interest and taxes (OPBIT) was recorded at RM37.4 million, translating to a lower OPBIT margin of 35.68%. RPII also reported its first pre-tax loss of RM2.6 million after accounting for its finance costs in the review period.

Cash flow from operations (CFO) fell sharply to RM52.9 million during the year (2015: RM91.0 million), due largely to the timing mismatch of the O&M fees paid to its O&M operator. As at December 31, 2016, the company’s cash reserves stood at RM102.8 million after meeting its finance service obligations and principal repayment of the IMTN of RM38.0 million and RM30.0 million respectively. Consequently, RPII’s finance service cover ratio (FSCR) stood lower at 2.40 times (x) (2015: 2.56x) while the facility debt-to-equity ratio was stable at 3.67x (2015: 3.66x).

Based on MARC’s sensitivity analysis of the IMTN, RPII’s cash flow coverage is resilient against stressed events of a 50% load factor, 10% reduction in capacity revenue and 10% increase in fuel costs and O&M expenses. The sensitivity also showed adequate coverage in the event of a depreciation in the ringgit to RM4.60 per US$1. Nonetheless, RPII’s liquidity buffer under these events would be constrained to finance the repayment of its guaranteed IMTN between 2022 and 2028. As such, the company would need to preserve healthy cash buffers between 2017 and 2021. Mitigating the liquidity risk are the adequate liquidated damages (LD) provision and insurance protection to address unexpected performance breaches. Assuming a five-year compounded annual growth rate of 3% (2018-2022) in its operating expenses, the power plant would need to operate on a load factor of 70% in order to breakeven.

The stable outlook on the IMTN reflects MARC’s expectations that RPII will continue to demonstrate commendable operational performance and prudently manage its financial metrics that correspond to its current rating. The outlook on the IMTN would be revised downwards if cash flow generation continues to yield non-cash FSCR of below 1.0x. Meanwhile, any changes in the rating and/or outlook of the guaranteed IMTN will be primarily driven by a change in Danajamin’s credit strength.

Major Rating Factors

Strengths

• Power purchase agreement allocates demand risk and fuel price risk to offtaker; and
• Satisfactory cash flow generation from power plant operation.

Challenges/Risks

• Power supply continues to outpace electricity demand;
• Reliance on retained cash flow to meet debt obligations from 2022 onwards; and
• Partial transfer of performance risks to operator.