Posted Date: September 25, 2019

MARC has affirmed its AAAIS rating on Gas District Cooling (Putrajaya) Sdn Bhd’s (GDC Putrajaya) RM300.0 million Al-Bai’ Bithaman Ajil Islamic Debt Securities (BaIDS) with a stable outlook. The current outstanding is RM50.0 million BaIDS payable in December 2022.

GDC Putrajaya is a wholly-owned subsidiary of Putrajaya Holdings Berhad (PJH) and is the sole supplier of chilled water for all government and commercial buildings in Putrajaya under long-term offtake agreements. The company operates and maintains a district cooling system of six plants for this purpose. The rating affirmation is driven by GDC Putrajaya’s monopoly position as the supplier of chilled water in Putrajaya, its steady revenue stream generated under long-term offtake agreements and its strong debt metrics. The rating is moderated by the absence of a gas and utility cost pass-through mechanism in the government offtake agreements which has led to fluctuating operating margins. The rating benefits from a three-notch rating uplift on parental support assessment based on GDC Putrajaya’s status as a strategic subsidiary of PJH and the evidence of past financial support extended by the parent. The stable outlook is premised on the expectation that parental support will be forthcoming and that there will be no material change to GDC Putrajaya’s business and financial profile.

For 1H2019, GDC Putrajaya recorded a 6.0% y-o-y rise in delivered chilled water to 92.0 million refrigeration tonnage hours, with the increase mainly attributed to supplying newly completed government buildings (Parcel F) in Putrajaya. The government remains its key customer, consuming 61.1% of total chilled water supplied in 1H2019, followed by third-party offtakers (including hotels, colleges and malls) at 24.1% and parent PJH at 14.8%. MARC also notes that a majority of the government offtake agreements will expire in 2021 for which renewal negotiations are ongoing.

The rating agency considers non-renewal risk to be low given GDC Putrajaya’s monopoly position in the supply of chilled water in Putrajaya. Concurrent with the renewal negotiations, the company will seek to incorporate a fuel cost pass-through mechanism in the government offtake agreements, the absence of which has meant GDC Putrajaya has had to absorb the cost of increase of gas price. This is reset every six months, while the tariff hike of 9% on chilled water is carried out once every three years with the next one due in January 2020. The timing mismatch between gas price revisions and tariff increases has led to margin volatility. For non-government offtake agreements, a cost pass-through mechanism is present.

GDC Putrajaya’s tariffs on chilled water comprise a demand charge and a variable charge under the offtake agreements; the demand charge accounted for 70.2% of GDC Putrajaya’s revenue of RM107.1 million in 1H2019 (1H2018: RM104.2 million). The demand charge mechanism mitigates demand risk and is designed to cover part of the company’s fixed operating costs and debt service obligations. The company incurred higher operating costs in tandem with the rise in natural gas costs which accounted for about 44.5% of the total operating cost. However, operating profit margin rose to 20.6% in 1H2019 (2018: 8.3%), largely due to the improvement in plant operations from the ongoing asset replacement exercise. Cash flow from operations (CFO) rose to RM20.2 million, leading to an improvement in its CFO debt metrics. As at end-June 2019, GDC Putrajaya’s debt-to-equity ratio stood at 0.13x.

The asset replacement and upgrading exercise is largely being funded by PJH through shareholders’ advances. For 2018, the company received RM73.9 million for ongoing upgrading works to reduce downtime caused by ageing equipment. The exercise will cost about RM200.0 million and is expected to be completed by 2020.

Ati Affira Kholid, +603-2717 2941/ affira@marc.com.my,
Rajan Paramesran, +603-2717 2933/ rajan@marc.com.my.

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