ARL Power Sdn Bhd - 2008 / 2009

MARC has affirmed the ratings of ARL Power Sdn Bhd’s (ARLP) RM177.0 million Al Bai’ Bithaman Ajil Secured Serial (ABBA) Bonds and RM50.0 million Islamic Medium Term Notes (IMTN) at A+ID. The ratings carry a 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), an 80%-owned subsidiary of Tenaga Nasional Berhad (rated AA+). Under the PPA, ARLP is assured of monthly capacity payment (CP) based on nominated plant capacity and availability, and energy payment (EP) based on sale of electrical energy. SESB possesses step-in-rights that can be exercised in the event of a fall in the rolling average equivalent availability factor (EAF) below 50% for 12 consecutive months. The ratings are moderated by the high maintenance cost of the plant’s engines which has affected its profit margins and lower CP revenue arising from reduced plant availability. 

ARLP, Sabah’s first independent power producer (IPP), operates a 50 MW medium fuel oil power plant situated in Melawa which produced a total net electrical output of 136,047 MWh for the financial year ended March 31, 2008 (FY2008), 39.8% higher than the 97,300 MWh in FY2007 due to an increased demand from SESB, prompted by lower tariff rates as provided in the PPA, that came into effect on October 31, 2007. A long-term supply agreement signed with Petronas Dagangan Berhad, the retailing arm of national oil company Petroliam Nasional Bhd (Petronas), until 2016 mitigates fuel supply risk throughout the tenure of the ABBA bonds and IMTN. At the same time, increases in fuel cost are automatically passed through to SESB under the PPA which protects ARLP’s margins.

For FY2008, revenue rose by 25.6% to RM87.0 million (FY2007: RM69.3 million), attributable to the growth in demand for electricity. Although revenue increased, gross profit and operating profit before interest and tax (OPBIT) declined by 17.1% and 9.8% to RM29.3 million (FY2007: RM35.4 million) and RM10.8 million (FY2007: RM12.0 million) respectively. CP revenue, which constituted 39.3% of total revenue in FY2008 and is designed to cover fixed operating costs, debt service and provide a return to shareholders, was affected by the decline in the rolling average EAF levels to below the target level of 87% due to several plant disruptions. Conversely, EP revenue, which made up 60.7% balance of total revenue and is meant to cover variable costs of plant operations including fuel costs, was higher compared to the previous year (FY2007: 43.9%).

ARLP’s liquidity position is adequate, as reflected in its cash holdings of RM12.0 million as at January 31, 2009 against short term debts of RM2.0 million ABBA bonds maturing in March 2009. ARLP had distributed an amount of RM14.5 million from its retained earnings on January 31, 2008 to offset advances owing by its holding company, ARL Associates Sdn Bhd, resulting in a slight deterioration in its debt-to-equity ratio from 2.0 times to 2.16 times. The advances to ARLP’s holding company was funded by IMTN proceeds in 2005.

The stable outlook reflects MARC’s view that ARLP’s declining debt burden will mitigate the effects of reduced operating profit margins and lower cash flow generation on its credit profile, going forward.

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Challenges/Risks