Monday, Aug 28, 2000
Malaysian Rating Corporation Berhad (MARC) has assigned a long-term rating of AID (Single A, Islamic Debt) in respect of ARL Tenaga Sdn Bhd’s RM177.0 million Al-Bai Bithaman Ajil Islamic Debt Securities Issue (BaIDS) (2000/2010).
ARL Tenaga Sdn Bhd’s (ARLT) rating is underpinned by a 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 whilst a pass-through provision for fuel expenses in the off-take agreement reduces volatility to operating budget; the adoption of proven engine design and well-developed operating methods for its plant and an issue structure which promotes the scheduled amortization of debt. These strengths are moderated by recent declines in plant operating performance below expectations assumed in the financial projections; declining but still substantial debt level and lack of institutional equity support.
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 is sold to Lembaga Letrik Sabah (LLS) (now, Sabah Electricity Sdn Bhd (SESB)) pursuant to a 21-year power purchase agreement (PPA). SESB is a wholly owned subsidiary of Tenaga Nasional Berhad which has assumed LLS’ functions.
The PPA has created a stable and predictable revenue stream through a minimum payment provision [capacity payment], dependent on plant capacity and availability. The capacity payment (CP) contributes 61% on average of ARLT’s total revenue, allowing the company to meet its fixed operating costs and service debts even when the plant is not dispatched. A force majeure event will not relieve SESB of its monthly CP obligations. Revenue from the sale of electrical energy (energy payments) are designed to cover fuel costs and variable operating costs associated with producing and delivering the energy.
The Sulzer ZAV40 diesel engines employed at the plant are backed by tested and proven technology and substantial operating experience world-wide. Operation and maintenance of the facility is carried out by ARL Janakuasa Letrik Sdn Bhd, under the supervision of Hyundai, the EPC contractor. Sufficient incentives have been incorporated in the O & M contract in the form of bonuses and penalty payments to minimize forced outages and ensure that availability and net capacity of the plant does not fall below 87% and 48 MW respectively. The maximum penalty payable by Hyundai is, however, capped at RM600,000 per annum.
The plant experienced minor declines in capacity payments for several months in 1998 and 1999 arising from reduced availability and net dependable capacity. The declines in capacity payments in FY99 were, however, compensated by increased energy payments as the plant was dispatched to the maximum of its net generating capacity continuously on a 24-hour basis. The plant’s heat rate remains manageable and below the level imposed in the PPA.
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. Changes in fuel prices are passed to SESB under the PPA through adjustments to the fuel component of energy payments.
The BaIDS are required to be paid on a quarterly basis; reducing refinancing risk at the maturity of the facility. By the fifth year of the facility, over 50% of the debt securities will have been redeemed. ARLT’s minimum and average debt service coverage ratio (before dividend payments) over the ten-year period is projected at 1.41 times and 2.48 times respectively (company’s base case projected cash flow). Under MARC’s sensitivity analysis based upon an assumption of falling availability and dependable capacity, the minimum and average DSCR will decline to 1.15 times and 1.78 times respectively.
ARLT’s debt leverage is high at 6.9 times, although this is much lower than the 10 times recorded in FY96. The risk associated with the high debt leverage is mitigated by the stable demand for electricity and manageable operating expenses. With the scheduled amortization of the Islamic debt, the company’s capitalization position is expected to gradually strengthen in the intermediate term.
ARL Tenaga Sdn Bhd’s (ARLT) rating is underpinned by a 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 whilst a pass-through provision for fuel expenses in the off-take agreement reduces volatility to operating budget; the adoption of proven engine design and well-developed operating methods for its plant and an issue structure which promotes the scheduled amortization of debt. These strengths are moderated by recent declines in plant operating performance below expectations assumed in the financial projections; declining but still substantial debt level and lack of institutional equity support.
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 is sold to Lembaga Letrik Sabah (LLS) (now, Sabah Electricity Sdn Bhd (SESB)) pursuant to a 21-year power purchase agreement (PPA). SESB is a wholly owned subsidiary of Tenaga Nasional Berhad which has assumed LLS’ functions.
The PPA has created a stable and predictable revenue stream through a minimum payment provision [capacity payment], dependent on plant capacity and availability. The capacity payment (CP) contributes 61% on average of ARLT’s total revenue, allowing the company to meet its fixed operating costs and service debts even when the plant is not dispatched. A force majeure event will not relieve SESB of its monthly CP obligations. Revenue from the sale of electrical energy (energy payments) are designed to cover fuel costs and variable operating costs associated with producing and delivering the energy.
The Sulzer ZAV40 diesel engines employed at the plant are backed by tested and proven technology and substantial operating experience world-wide. Operation and maintenance of the facility is carried out by ARL Janakuasa Letrik Sdn Bhd, under the supervision of Hyundai, the EPC contractor. Sufficient incentives have been incorporated in the O & M contract in the form of bonuses and penalty payments to minimize forced outages and ensure that availability and net capacity of the plant does not fall below 87% and 48 MW respectively. The maximum penalty payable by Hyundai is, however, capped at RM600,000 per annum.
The plant experienced minor declines in capacity payments for several months in 1998 and 1999 arising from reduced availability and net dependable capacity. The declines in capacity payments in FY99 were, however, compensated by increased energy payments as the plant was dispatched to the maximum of its net generating capacity continuously on a 24-hour basis. The plant’s heat rate remains manageable and below the level imposed in the PPA.
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. Changes in fuel prices are passed to SESB under the PPA through adjustments to the fuel component of energy payments.
The BaIDS are required to be paid on a quarterly basis; reducing refinancing risk at the maturity of the facility. By the fifth year of the facility, over 50% of the debt securities will have been redeemed. ARLT’s minimum and average debt service coverage ratio (before dividend payments) over the ten-year period is projected at 1.41 times and 2.48 times respectively (company’s base case projected cash flow). Under MARC’s sensitivity analysis based upon an assumption of falling availability and dependable capacity, the minimum and average DSCR will decline to 1.15 times and 1.78 times respectively.
ARLT’s debt leverage is high at 6.9 times, although this is much lower than the 10 times recorded in FY96. The risk associated with the high debt leverage is mitigated by the stable demand for electricity and manageable operating expenses. With the scheduled amortization of the Islamic debt, the company’s capitalization position is expected to gradually strengthen in the intermediate term.