The assigned rating reflects the stable and predictable cash flow which is expected to cover the company’s debt servicing requirements comfortably; the presence of a long-term fuel supply contract which eliminates supply disruption risk; and an issue structure which promotes the scheduled amortization of the Islamic debt. These strengths are moderated by the declining but still substantial debt level and limited financial flexibility.

ARLT owns and operates a 50 MW medium fuel oil power plant in Melawa, Sabah. The power plant’s total generating capacity and energy production are sold to Sabah Electricity Sdn Bhd (SESB) pursuant to a 21-year Power Purchase Agreement (“PPA”) commencing on 31 October 1995. SESB, an 80%-owned subsidiary of Tenaga Nasional Berhad, has assumed the functions of the previous Sabah Electricity Board or Lembaga Letrik Sabah.

The PPA has been structured to provide a stable and predictable revenue stream through a minimum payment provision [capacity payment], dependent on plant capacity and availability. The capacity payment (“CP”) contributes 64.6% of ARLT’s total revenue for FY2003, allowing the company to meet its fixed operating costs and service debts even when the plant is not dispatched.

Medium fuel oil for the plant’s operation is supplied by PETRONAS Dagangan Bhd under a 15-year contract. The risk of insufficient fuel supply is mitigated by the availability of fuel storage
facilities at the site and the presence of other oil companies operating within the vicinity. Any increases in fuel prices are passed to SESB, through adjustments to the fuel component of EPs under the PPA, thereby preserving the company’s operating margin. Nevertheless, the pass-through mechanism is only valid if ARLT’s operational heat rate is equal to or less than the heat rate nominated in the PPA, which is 8,636 mmBtu.

For fiscal year 2003 (FY2003), ARLT’s revenue rose 17.7% compared to FY2002 largely due to the increase in energy payment to RM20.3 million (FY2002: RM11.6 million) as demand for electricity in the state of Sabah grew. Meanwhile, a disproportionate increase in operating cost by 35.3% arising mainly from higher fuel expenses of RM20.6 million (FY2002: RM12.5 million), however, squeezed operating margin to 32.0%. Since SESB dispatched from ARLT at a low capacity, the higher consumption rate of fuel caused the heat rate at times to be higher than the nominated heat rate in the PPA. Hence, ARLT was unable to pass through the extra fuel costs incurred to SESB. Nonetheless, operating profit margin is still higher than the three-year average of 28.8% achieved previously.

ARLT is projecting a minimum and average DSCR of 1.24 times and 1.38 times respectively. In terms of the company’s gearing position, the pro-forma debt-to-equity after the issuance of the first tranche of the IMTN is 3.0 times, comfortably below the covenanted level of 9.0 times.