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 the RM710 million Islamic Medium-Term Notes (IMTN) Programme at AAAIS(fg) and AAIS respectively.

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 the RM710 million Islamic Medium-Term Notes (IMTN) Programme at AAAIS(fg) and AAIS respectively. The outlook for both ratings is stable. RPII is a special purpose project company that operates the 190-megawatt combined-cycle gas turbine (CCGT) Rugading Power Station in Sabah.

The rating on the guarantee notes is premised on the unconditional and irrevocable Kafalah guarantee provided by Danajamin Nasional Berhad (Danajamin), which carries a financial insurer rating of AAA/stable from MARC. The rating on the non-guaranteed notes incorporates the overall sound plant performance as well as cash flow metrics that are largely consistent with the projections. The rating is also supported by RPII's 21-year take-or-pay power purchase agreement (PPA) which allocates demand risk and fuel price risk to the sole offtaker, Sabah Electricity Sdn Bhd (SESB), through contracted capacity revenues and energy payments. MARC views SESB's ability to make payments to RPII as strong based on, among other factors, its 83%-ownership by Tenaga Nasional Berhad (TNB), on which MARC currently maintains a senior unsecured debt rating of AAA/Stable.

RPII's Rugading Power Station, which commenced combined-cycle commercial operations in April, 2011, currently accounts for about 14.4% of the current installed generation capacity in Sabah. MARC notes that RPII has not encountered further major unplanned outages following the resumption of full operations on February 21, 2013 after one of its two gas turbines was damaged on December 5, 2012. Despite the 79-day shutdown of the gas turbine which resulted in the drop in RPII's availability target in January 2013, the plant has managed to achieve an overall rolling contractual average availability target (CAAT) of 94.4% for the 2011-2013 contract year block, well within the required three-year rolling CAAT requirement of 94%. For the first quarter of 2014, the plant achieved its monthly average availability target of 98.3% and rolling CAAT of 94.5% and registered a one-year rolling unplanned outage rate of below 4%, in compliance with prescribed performance standards under the PPA.

As a result of the 79-day shutdown which led to lower capacity payment, RPII's year-on-year revenue declined by 8.8% to RM109.1 million (2012: RM119.7 million) in 2013. However, RPII's operating profit before interest and tax (OPBIT) increased to RM62.9 million (2012: RM59.8 million) in 2013 due largely to the one-off RM15 million insurance claim received from the outage incident. RPII continues to maintain strong OPBIT margin and OPBIT interest coverage of 57.6% and 1.49 times (2012: 50.0%; 1.36 times) respectively for 2013.

RPII's cash flow from operations (CFO) of RM75.8 million in 2013, which was slightly higher than the projected CFO of RM63.9 million, was more than sufficient to cover the profit payments and principal redemption totalling RM51.1 million in 2013. Accordingly, the forward looking FSCR in 2013 stood higher at 3.41 times than the projected FSCR of 3.29 times and well above the minimum FSCR covenant of 1.25 times. As RPII did not declare any dividends in 2013, its cash and cash equivalents increased to RM163.5 million from RM135.2 million in 2012, providing a strong buffer to meet its profit payment and principal redemption for 2014 and 2015 amounting to RM60.6 million and RM69.3 million respectively. MARC notes that RPII has made the scheduled repayment of RM20 million under the sukuk programme in June 17, 2014.

For 2014, RPII's shareholders' equity is expected to decline sharply due to its sizeable projected shareholders' distribution of RM77.4 million and preference share capital and premium reduction of RM90 million in 2014. Consequently, the pro-forma debt-to-equity (DE) ratio for 2014 is expected to increase to 78:22 (2013: 68:32), approaching the leverage covenant limit of 80:20. Nonetheless, MARC expects RPII's leverage ratio to decrease progressively with the accumulation of retained earnings and paring down of the outstanding under the rated notes.

The stable outlook on the non-guaranteed notes reflects MARC's expectations that RPII will continue to maintain the power plant's operational performance and prudently manage its financial position which commensurates with the AA rating. Downward rating pressure on the non-guaranteed notes could emerge if RPII's cash flow coverage and/or capital structure deteriorate significantly. 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.

Contacts: Ng Chun Kean, +603-2082 2230/ chunkean@marc.com.my; David Lee, +603-2082 2255/ david@marc.com.my.