MARC has affirmed its ratings of AAA_IS(fg) on Ranhill Powertron II Sdn Bhd’s (RPII) RM350 million guaranteed notes and AA_IS on RM360 million non-guaranteed notes. The outlook for both ratings is stable. Both guaranteed and non-guaranteed notes were issued under the RM710 million Islamic Medium-Term Notes (IMTN) Programme. 

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

The rating on the non-guaranteed notes considers RPII’s adequate projected debt service coverages and high predictability of operating cash flows through the PPA. The PPA transfers demand risk and fuel price risk to the offtaker Sabah Electricity Sdn Bhd (SESB), an 83%-owned subsidiary of Tenaga Nasional Berhad (TNB). MARC maintains a senior unsecured debt rating of AAA/Stable on TNB. The rating on the non-guaranteed notes also incorporates RPII’s sound plant performance and financial metrics that are largely consistent with projections as well as SESB’s strong payment track record. The rating is, however, constrained by RPII’s increased gearing and weakened liquidity buffer following sizeable dividend payments. 

The Rugading Power Station, which accounts for about 11% of Sabah’s installed generation capacity, has continued to meet the performance requirements under the PPA since the 79-day unscheduled outage at end-2012, registering an average availability target of 96.1% and 100% in 2014 and 1Q2015 respectively. RPII’s unplanned outage rate (UOR), calculated on a 12-month rolling average basis, has normalised below the 4% limit since February 2014. RPII has also achieved full pass-through of the natural gas and distillate costs as a result of meeting the heat rate requirements.

RPII’s 2014 capacity payments of RM96.4 million were within expectations. However, its energy payments of RM117.9 million were higher than the budgeted amount of RM104.6 million due to distillate firing in March and August 2014. In line with higher PPA payments, the company’s 2014 revenue improved by 16.5% to RM127.1 million (2013: RM75.8 million). RPII’s cash flow from operations (CFO) after taking into account the RM90 million redemption of the redeemable convertible non-cumulative preference shares (RCNPS) stood at RM102.0 million and was sufficient to cover the profit payment and principal redemption totaling RM56.7 million in 2014. The finance service cover ratio (FSCR) stood at 3.59 times, comfortably above the covenanted minimum FSCR of 1.25 times in 2014.

RPII’s shareholders’ funds decreased sharply to RM169.5 million in 2014 (2013: RM330.1 million) following the dividend payout of RM77.4 million and the redemption of RCNPS. While this has weakened the company’s leverage covenant cushion, RPII’s leverage ratio of 78:22 is expected to improve progressively as retained earnings are accumulated and outstanding rated notes are pared down. In addition, RPII is prohibited from incurring further indebtedness. MARC also expects RPII to take a prudent approach in meeting shareholders’ dividend expectations even though the dividend distribution is mitigated by restrictive covenants. 

The stable outlook on the non-guaranteed notes incorporates MARC’s expectations of a sustained stable plant performance and RPII maintaining its credit profile commensurate with the current rating band. Any weakening of RPII’s cash flow coverage and/or leverage metrics will exert downward rating pressure on the non-guaranteed notes. In respect of the guaranteed notes, any change in the rating and/or outlook will be primarily driven by a change in Danajamin’s credit strength.