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 reaffirmations are based on the stable and predictable cash flows of the company which has allowed it to service its debt obligations on a timely manner, the presence of a long-term fuel supply contract which eliminates supply disruption risks, and an issue structure which promotes the scheduled amortization of the Islamic debt. Moderating these strengths, however, are high operational risks, declining operating profit margin, relatively high debt level and limited financial flexibility.

ARLP, which is the first Independent Power Producer (IPP) in Sabah, was incorporated in November 1993 for the purpose of developing, operating and owning a 50MW medium fuel oil power plant in Melawa, Sabah. The Melawa power plant is configured with four 12.5MW diesel generating sets, providing in total 47.5MW of net generating capacity.

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) with effect from 31 October 1995. SESB is an 80%-owned subsidiary of Tenaga Nasional Berhad (TNB).

ARLP continued to register a positive growth in revenue in its FY2006, which totaled RM73.5 million compared with RM69.3 million in FY2005. Capacity payments (CPs) from its offtaker are the mainstay of ARLP’s revenue accounting for about 52.5% of total revenue in FY2006 (FY2005: 56.4%). The high proportion of CPs provides added comfort to the company as it provides ARLP with a sustainable and predictable stream of revenue. Nevertheless, there was a slight decrease in operating margins, due mainly to higher fuel expenses, which increased to RM35.8 million in FY2006 from RM31.0 million in FY2005.

During FY2006, ARLP had encountered operational problems with its plants in the months of April and May 2006. During these months, ARLP was not able to maintain the desired applicable Equivalent Availability Factor (EAF) of 87% due to uneconomic load despatch patterns by SESB resulting in higher frequency of maintenance outages and thus reduced availability. The problems of higher maintenance outages have been overcome as reflected in the higher monthly EAF rates during the period from June 2005 to June 2006, which averaged above 90%, and had been maintained above 87% since October 2005.

The accumulation of retained profits over the past few years has helped to cushion the high debt leverage level of ARLP, while the scheduled amortization of the IMTN and the ABBA bonds are expected to strengthen the capital structure of the company going forward. ARLP’s financial flexibility is somewhat limited given its high leverage and lack of institutional shareholder backing. The company is further restricted by its relatively low cash level which as at FYE2006 stood at RM28.6 million; albeit an increase from RM10.2 million in FY2005.