The ratings of ARL Power Sdn Bhd’s (ARLP) RM177.0 million Al-Bai’ Bithaman Ajil Secured Serial Bonds (ABBA) and RM50.0 million Islamic Medium Term Notes (IMTN) have been reaffirmed at A+ID. The rating reaffirmation is based on the stable and predictable cash flow which has allowed them to service its debt obligations on a timely manner, 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. Moderating these strengths is the increase in the maintenance costs of the plant’s engines, declining operating profit margin, relatively high debt level and limited financial flexibility.

As the owner and operator of a 50 MW medium fuel oil power plant in Melawa, Sabah; ARLP has a Power Purchase Agreement (PPA) with Sabah Electricity Sdn Bhd (SESB) to generate and sell electrical energy to the latter, an 80%-owned subsidiary of Tenaga Nasional Berhad, for 21 years commencing from 31 October 1995. In FY2005, capacity payment (CP) which is the minimum payment provision in the PPA contributed about 55.5% of ARLP’s revenue. This is lower than the previous year’s contribution of 60.2% and this is due to ARLP’s inability to meet the desired availability dependable capacity, which in turn is one of the components dictating the CP. Notwithstanding, ARLP has been able to meet its fixed operating costs and service its debts as the CP was structured to provide a stable and predictable revenue stream to the company even when the plant is not dispatched by SESB.

Operationally, ARLP had encountered problems with its plant specifically in the months of January, February, April and May of 2005. During those months, ARLP wasn’t able to attain the desired available dependable capacity due to the uneconomic load despatch pattern by SESB resulting in high repairs and maintenance costs and reduce availability. Under the PPA, ARLP is expected to attain an average gross heat rate which is lower than the nominated heat of 8,636 mmBtu. Between November 2004 and November 2005, ARLP had attained an average gross heat rate of 8,484 mmBtu, well below the nominated heat rate.

Financially, ARLP has managed to show top line growth and this has continued growth in FY2005 when revenue edged higher by 7.4% to RM69.3 million. The higher revenue was on the back of higher fuel revenue underlined by the higher demand for electricity in the state of Sabah. Nonetheless, the single-digit growth rate was outstripped by a relatively higher increase in operating cost which rose by 20.6% as the company felt the impact of the higher maintenance expenses. Consequently, ARLP’s operating profit margin declined substantially to 18.0% from 28.0% previously.

Cash flow has been fairly strong as evident from the high interest and debt coverage as ARLP benefited from the relatively stable CPs in FY2005. Capital structure wise, as at 30 September 2005, ARLP’s total debt stood at RM87.0 million giving a debt leverage ratio of 3.2 times based on FY2005’s shareholders’ equity, an improvement from 3.6 times as at end of FY2004.