RANHILL POWERTRON II SDN BHD - 2018

MARC has affirmed its ratings on Ranhill Powertron II Sdn Bhd’s (RPII) RM190.0 million outstanding Islamic Medium-Term Notes (IMTN) and RM350.0 million outstanding guaranteed IMTN at AA_IS and AAA_IS(fg). The outlook on the ratings is stable.

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 and a long-term counterparty credit rating of AAA/stable. The rating on the IMTN reflects RPII’s sufficient projected cash flow coverages which are underpinned by the favourable terms of its power purchase agreement (PPA) with the offtaker Sabah Electricity Sdn Bhd (SESB), the sole electrical transmission system operator in Sabah, which is 83.0%-owned by Tenaga Nasional Berhad (TNB).

The stable outlook on the IMTN reflects MARC’s expectations that RPII will continue to demonstrate commendable operational performance and manage its financial metrics in line with its current rating. However, if the liquidity buffer were to decline such that the non-cash finance service cover ratio (FSCR) is below 1.0x, the outlook would be revised to negative. Meanwhile, any changes in the rating and/or outlook of the guaranteed IMTN will be primarily driven by changes in Danajamin’s credit strength.

RPII owns and operates Rugading Power Station, a 190-megawatt (MW) combined-cycle gas turbine (CCGT) power plant in Sabah, under a 21-year PPA. The plant has continued to meet its availability target, heat rate and unscheduled outage rate as per PPA requirements. However, excess energy capacity in Sabah which has affected energy payments (EP) to RPII and the potential reliance on cash buffers from 2023 onwards when a step-down in the capacity rate financial (CRF) occurs remain key concerns.

RPII’s average availability target (AT) declined to 91.7% in 2017 (2016: 94.4%) due to a scheduled maintenance on the steam turbine in September 2017. The power plant’s average AT subsequently improved to 96.3% during 1H2018. RPII received actual capacity payments (CP) of RM96.9 million and RM48.1 million for 2017 and 1H2018, which were in line with the budget. However, EP was 6.6% lower-than-budget at RM86.4 million in 2017 due to a lower capacity factor of 56.7%. This improved to 61.8% in 1H2018 on a higher load dispatched from the grid, providing higher EP of RM42.4 million against the budgeted RM37.4 million.

For 2017, RPII’s operating profit before interest and taxes (OPBIT) stood higher at RM39.7 million attributable mainly to lower maintenance cost, which contributed to a turnaround to a profit of RM1.6 million. Cash flow from operations (CFO) improved to RM86.5 million (2016: RM52.9 million), leading to higher cash reserves at RM122.3 million. RPII’s FSCR stood at 2.56 times (x) while the facility debt-to-equity (DE) ratio was at 3.63x.

As at 1H2018, RPII’s profit before tax stood lower at RM0.9 million compared to RM2.1 million in 1H2017 attributed to a reversal of payables. The company’s cash reserves of RM79.6 million at end-1H2018 (1H2017: RM86.4 million) are sufficient to service its next profit payment and principal payment of RM50.0 million in 2019.

Under the latest base case cash flow projections, the minimum and average pre-distribution FSCR over the next five years are 2.08x and 2.22x. Based on MARC’s sensitivity analysis, RPII’s cash flow coverage is resilient against stressed events with a 50.0% load factor, among other assumptions, but could experience liquidity challenges between 2022 and 2028 upon CRF step-down beginning 2023. In this regard, MARC expects RPII to exercise discipline on dividend distributions to maintain sufficient liquidity buffer.

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 in Sabah;
• Potential reliance on retained cash flow to meet debt obligations from 2023 onwards; and
• Partial transfer of performance risks to operator.