ARL Power Sdn Bhd - 2007

Major Rating Factors

Strengths

• Strong cash flows generated under a 21-year power purchase agreement (PPA)
• Declining debt leverage and reducing debt service burden

Challenges/Risks

• High maintenance costs of the plant’s engines
• Prospect of lower revenue and cash flows with the reduction in capacity payment (CP) effective 31 October 2007 as provided under the PPA. 

Rationale         MARC has reaffirmed the A+ID ratings of ARL Power Sdn Bhd’s (ARLP) RM177 million Bai Bithaman Ajil Secured Serial Bonds and RM50 million Islamic Medium Term Notes.  The ratings carry stable outlook. 

The ratings principally reflect the strength of cash flows generated under a 21-year power purchase agreement (PPA) with Sabah Electricity Sdn Bhd (SESB).  SESB is 80%-owned subsidiary of Tenaga Nasional Berhad (rated AA+), Malaysia’s largest electricity utility company.  Under the PPA, ARLP receives a monthly capacity payment (CP) that is designed to cover fixed operating costs, debt service and provide a return to shareholders, and an energy payment (EP) which is used to cover the fuel cost, and other variable operating costs.  SESB possesses step-in-rights that can be exercised in the event of a fall in the equivalent availability factor (EAF) below 50% for 12 consecutive months.  The plant continues to meet its availability target level of 87%.

The rating also reflects the high maintenance costs of the plant’s engines, as well as the prospect of lower revenue and cash flows with the reduction in CP effective October 31, 2007, as provided under the PPA.  The stable outlook reflects MARC’s view that ARLP’s financial profile will continue to support its current rating with ARLP’s declining debt leverage and reducing debt service burden will mitigate the effects of the reduced operating profit margins, going forward.

ARLP, Sabah’s first Independent Power Producer (IPP), and its 50 MW medium fuel oil power plant is situated in Melawa.  In FY2007, the power plant produced a total of net 97,300 MWh of output, approximately 20% lower than its prior year level at 122,100 MWh as demand from SESB reduced with the commissioning of a new IPP in the state of Sabah.  A long term supply agreement signed with Petronas Dagangan Berhad (PDB) mitigates ARLP’s fuel supply risk while the tariff structure under the PPA protects ARLP’s margin stabilizing as it automatically passes fuel costs to SESB.

For the financial year ended March 31, 2007, revenue which comprised CP and EP decreased by 5.77% to RM69.29 million. EP declined on account of lower electricity demand from SESB as reflected in reduced net energy output (NEO).  CP contributed about 56.1% of revenue and RM38.84 million on average for the five years.  ARLP generated free cash flow of RM15.0 million in FY2007 and RM12.7 million in FY2006. Its liquidity position is adequate, as reflected in its holding of cash and cash equivalents of RM23.3 million against short term borrowings of RM16 million as at 31 August 2007. ARLP’s outstanding debt as at 31 March 2007 stood at RM74.3 million, including the rated bonds and notes. The company’s financial profile continues to be commensurate with the A+ID rating.