RANHILL POWERTRON II SDN BHD - 2019

MARC has affirmed its ratings on Ranhill Powertron II Sdn Bhd’s (RPII) RM140.0 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.

RPII owns and operates the 190 MW combined cycle gas turbine (CCGT) Rugading Power Station in Sabah under a 21-year Power Purchase Agreement (PPA) with Sabah Electricity Sdn Bhd (SESB), an 83%-owned subsidiary of Tenaga Nasional Berhad (TNB).

The AAA_IS(fg) rating reflects the unconditional and irrevocable Kafalah guarantee provided by Danajamin Nasional Berhad (Danajamin) on which MARC has an insurer financial strength rating and a long-term counterparty credit rating of AAA/stable. Any change in the rating and/or outlook of the guaranteed IMTN will be primarily driven by a change in Danajamin’s credit strength.

The standalone AA_IS rating incorporates satisfactory projected cash flow coverages, underpinned by the availability-based capacity payment structure under the PPA which also allocates demand risk and fuel price risk to the offtaker, SESB. RPII’s sound plant performance to date and cash flow generation have been consistent and commensurate with the standalone rating. The stable outlook on the non-guaranteed notes reflects MARC’s expectations that RPII’s power plant will maintain its operational performance and that the company will continue adhere to prudent financial management.

The Rugading power plant is positioned to meet the contracted average availability target of 94.08% in contract year block 2017-2019 as a result of the comfortable buffer provided by its actual contracted average availability target of 97.06% in 2018. As at end-1Q2019, RPII’s annual average availability target stood at 94.08%, above the 94% base line. The plant’s unplanned outage rate, between 1.7% and 3.7%, has been well within the unplanned outage limit of 4.0% during the period under review. Accordingly, RPII received capacity payments of RM96.9 million in 2018 and RM23.9 million in 1Q2019, in line with its budget.

The company recorded higher energy payments of RM93.6 million (2017: RM86.4 million) due to a higher electricity generation output, which increased by 15.4% y-o-y to 1,077.4GWh. The company also achieved full pass-through of natural gas and distillate costs to SESB on meeting the heat rate requirements. Nonetheless, cash flow from operations (CFO) of RM46.5 million in 2018 was lower than the previous year of RM82.9 due to two main reasons. Firstly, RPII made a one-off advance payment to General Electric Company (GE) amounting to RM13.5 million for GE fees FY2019, as part of the consideration for renegotiated contractual service agreement. The renegotiation has enabled RPII to save RM4.0 million annually in maintenance costs. The lower CFO is also partly due to a delay in receiving a payment of about RM21.3 million from the offtaker. This payment was received in 1Q2019.

Under the base case cash flow projections, the minimum and average pre-distribution finance service cover ratios (FSCR) between 2019 and 2028 stood at 2.13x and 2.44x. MARC’s sensitivity analysis demonstrates that RPII’s FSCR remains resilient against a reduction in capacity payment or an increase in operating cost but its liquidity headroom could reduce from 2023 onwards upon the stepdown of the capacity rate financial to RM23.80/kW/month from RM36.50/kW/month. In this regard, MARC expects the company to maintain strict discipline on dividend distribution to mitigate liquidity concerns. RPII has three remaining payments under the IMTN programme expiring in June 2022. The payments under the guaranteed IMTN begin in 2023 and end in 2029. The PPA which expires in 2031 adequately covers the tenure of the guaranteed IMTN programme.

Major Rating Factors

Strengths

• Demand risk and fuel price risk are allocated to offtaker;
• Satisfactory cash flow generation from power plant operation; and
• Healthy financial service cover ratio.

Challenges/Risks

• Maintain healthy liquidity level given step down in capacity rate financial will occur from 2023 onwards;
• Partial transfer of performance risks to operator.