MARC has assigned ratings of AAIS to the non-guaranteed notes and AAAIS(fg) to the guaranteed notes to be issued under Ranhill Powertron II Sdn Bhd's (RPII) RM710 million nominal value Islamic Medium Term Notes Programme (IMTN Programme or Sukuk). The outlook for both ratings is stable. The non-guaranteed notes of up to RM360 million will have tenures up to 11 years while the guaranteed notes of up to RM350 million will have tenures ranging from 12 to 18 years. The proceeds from the Sukuk offerings will be used largely to refinance project-level existing debt taken during the construction phase.

RPII is a special purpose 80%-owned subsidiary of Ranhill Power Sdn Bhd (RPSB) which was established to build, own and operate a 190MW combined-cycle gas turbine (CCGT) power plant in Kota Kinabalu Industrial Park, Sabah (Rugading Power Station, or Rugading) under a 21-year Power Purchase Agreement (PPA). Delays in the financial close of initial financing for the project had delayed commercial operations beyond the PPA target dates of November 2009 and April 2010 to March and July 2010 for the facility's first and second gas turbine respectively. 

The rating and outlook on the guaranteed notes reflect the credit strength of an unconditional and irrevocable guarantee to be provided by Danajamin Nasional Bhd, which MARC currently rates AAA/Stable.

The rating on the non-guaranteed notes reflects forecast project debt service coverage ratios at 5.84 times (x) average and 4.03x minimum under a 21-year Power Purchase Agreement (PPA) with Sabah Electricity Sdn Bhd (SESB), an 80%-owned subsidiary of Tenaga Nasional Bhd (rated AAA/Stable by MARC). Availability-based capacity payments generated under the PPA are expected to cover fixed expenses, debt service payments and provide residual cash flow for project owners. The PPA provides for two-tiered capacity payment rates which step down from RM36.50 per kW per month to RM23.80 per kW per month from the 13th year of operations onwards. Energy payments, the other component of RPII's revenue, allow for recovery of fuel costs and the plant's variable costs. The projected cash flow coverage exhibits a fairly high resilience to declines in forecast plant availability as long as it remains above 82%. 

The rating also reflects RPII’s adequately structured key project contracts pertaining to the allocation of demand, fuel price and performance risks among the project parties: offtaker, engineering, procurement and construction (EPC) contractor and operation and maintenance (O&M) operator. The project's gas fuel supply is also fully secured until December 2020 under a gas sale agreement with Petroliam Nasional Berhad and Petronas Carigali Sdn Bhd, after which its exposure to fuel supply risk rises moderately.

MARC notes that RPII's capacity payments are subject to deductions if the plant's availability (Equivalent Availability Factor or EAF) falls below the target of 94%. Additionally, RPII may achieve less than full pass-through of fuel costs if heat rates achieved by the plant exceed allowable levels under the PPA. The foregoing risks are mitigated to a meaningful extent through a combination of reliance on commercially proven power generation technology, performance incentives given to O&M operator, Ranhill Power II O&M Sdn Bhd, and the operator's familiarity with CCGT power plant operations. (RPSB's adjacent Teluk Salut Power Station, a 190MW CCGT power plant, continues to demonstrate satisfactory operational performance.) The EPC contractor, China National Electric Engineering Co Ltd (CNEEC), has provided a performance bond equal to 10% of the contract price for the duration of the construction and commissioning phase and is liable to pay liquidated damages in the event of deviations from the guaranteed net output and heat rate levels. Annual liquidated damages claimable from the O&M operator, meanwhile, are capped at RM5.0 million. MARC believes that RPII remains exposed to the risk of extended operational issues which could result in poorer-than-projected financial performance given the high EAF required under the PPA and caps on liquidated damages payable by contractors.
 
There is no construction risk remaining in the project. The plant's two 65MW gas turbines are currently operated in an open cycle configuration; both turbines became operational in 2010. Rugading Power Station uses tested and proven General Electric (GE) 6F turbine technology. The tested net plant capacity of Rugading's full combined cycle facility of 198MW provides reasonable assurance that the PPA availability target of 94% is achievable. Rugading successfully completed its 30-day reliability test for its combined-cycle operations on April 21, 2011, pursuant to which declaration of commercial operation is expected to follow shortly.   
 
Projected revenues assume Rugading will be dispatched at an availability factor of 94% and attainment of allowable heat rates agreed in the PPA. Rugading is expected to provide baseload and intermediate generating capacity. Its configuration allows it to meet continuous as well as intermediate demand. MARC notes that RPSB's adjacent Teluk Salut Power Station, which also provides similar flexible generating capacity, is running at a fairly high average load factor of 84%. This leads MARC to believe that Rugading will not be dispatched at levels significantly lower than projected in the absence of operational issues.   

Noteholders are protected from short-term cash flow shortfalls by six-month debt service reserves. Financing documentation will provide standard protections and cash flow ring-fencing, including a waterfall and restricted distributions test. RPII is required to maintain a minimum covenanted finance service coverage ratio (FSCR) of 1.25x and an annual debt-to-equity ratio not exceeding 80:20. 

The stable outlook on the non-guaranteed notes reflect MARC's view that downward movement in the AAIS rating should be limited if project operations proceed as anticipated and exhibit adequate operating performance.

The standalone credit profile of the guaranteed notes becomes more susceptible to downside risks such as lower-than-projected plant availability and unanticipated operational issues beginning in April 2023 when the lower second tier capacity payment rate comes into effect. The decline in operating cash flow generation has to be offset by higher cash flow retention during earlier years of operation for RPII to maintain comfortable FSCR covenant compliance headroom. Noteholders of the guaranteed notes are nevertheless insulated from downside risks, including lower capacity payment rates, in relation to the standalone credit profile of the notes by virtue of the guarantee provided by Danajamin.

Contacts:
David Lee, +603-2082 2255/ david@marc.com.my;
Jason Kok Ching Wui, +603-2082 2258/ jason@marc.com.my;
Sandeep Bhattacharya, +603-2082 2247/ sandeep@marc.com.my.