MARC has affirmed the ratings on Ranhill Powertron II Sdn Bhd’s (RPII) RM350 million guaranteed notes and RM360 million non-guaranteed notes issued under its RM710 million Islamic Medium Term Notes (IMTN) Programme at AAAIS(fg) and AAIS  respectively. The outlook for both ratings is stable. RPII is the special purpose project company that operates the 190- megawatt combined-cycle gas turbine (CCGT) Rugading Power Station in the state of Sabah.

The affirmed rating and outlook on the guaranteed notes are underpinned by an irrevocable and unconditional Kafalah guarantee provided by Danajamin Nasional Berhad (Danajamin). MARC currently rates Danajamin’s financial strength rating at AAA/stable premised on the strong credit profile of Danajamin on the basis of its status as a government-sponsored and owned financial guarantee insurer and perceived high support from the government in view of its public policy objective of facilitating greater corporate access to the domestic sukuk and bond markets.

The affirmed rating on the non-guaranteed notes reflects the continued sound plant operations, actual cash flow generation and financial metrics which are largely consistent with projections, and RPII’s credit supportive take-or-pay power purchase agreement (PPA) with offtaker Sabah Electricity Sdn Bhd (SESB). Accounting for around 14.4% of the current installed generation capacity of the Sabah energy grid, the Rugading Power Station is currently operated as a base load plant and has a high ranking in the dispatch order. The PPA, meanwhile, transfers demand and fuel price risks to SESB, whose capacity to make payments to the project company is considered very strong on account of Tenaga Nasional Berhad’s 80% ownership interest in SESB. (MARC currently maintains a senior unsecured debt rating of AAA/Stable on TNB).

RPII’s non-guaranteed notes are secured by a pledge of revenues from the operation of the Rugading Power Station under a 21-year take-or-pay PPA with SESB on a pari-passu basis with Danajamin. After commencing combined-cycle commercial operations on April 22, 2011, the Rugading Power Station has been meeting all prescribed performance standards under the PPA until December 2012 when one of its two gas turbines, GT1A, had to be shut down due to damaged compressor rotor blades and stator vanes. The gas turbine remained unavailable for 79 days, leading to a loss in availability-based capacity revenue of RM12.4 million, in addition to a loss in energy revenue of RM3.1 million and compressor rotor replacement cost of RM15.7 million. The losses are expected to be moderated by claimable insurance proceeds of RM19.6 million (net loss of RM11.6 million). While questions surrounding the root cause of the damage to GT1A’s compressor rotor blades and stator vanes remain, MARC notes that the faulty compressor rotor was replaced and performance has been brought back on track since February 21, 2013. MARC is mindful that RPII may incur loss in capacity revenue in the event of further unplanned outages in the next one-year period on account of reduced generating unit availability.

RPII’s 2012 results reflect a full year of combined-cycle operations. RPII recorded its first pre-tax profit of RM15.7 million on revenue of RM119.7 million compared to a pre-tax loss of RM8.4 million on revenue of RM149.4 million in its previous 18-month financial period ended December 31, 2011 (18M2011). RPII generated significant operating cash flow (CFO) during the year of RM103.5 million (18M2011: RM40.3 million) and its cash holdings increased to RM135.2 million as at end-2012 from RM72.8 million the year before. RPII’s finance service cover ratio (FSCR) and debt-to-equity ratio of 4.11 times (x) and 69:31 respectively in 2012 remained well within expectations and in compliance with its minimum covenanted levels of 1.25x and 80:20 respectively. After making its first principal repayment of RM10.0 million in June 2013, RPII is expected to pay dividends of RM64.0 million in the current financial year with pre-distribution and post-distribution FSCRs projected at 3.89x and 2.64x respectively.

The stable outlook reflects MARC’s expectations that Rugading Power Station’s operational performance will continue to support financial metrics within the ‘AA’ rating category. Downward rating pressure on the non-guaranteed notes could occur if persistent operational issues were to affect the project’s cash flow generating ability. As the rating and outlook of the guaranteed notes are underpinned by the guarantee provided by Danajamin, any change in the rating of the guaranteed notes will be primarily driven by a change in Danajamin’s credit strength.

Contacts:
Koh Shu Yunn, +603-2082 2243/ shuyunn@marc.com.my;
David Lee, +603-2082 2255/ david@marc.com.my.