MARC has assigned a preliminary rating of AAAIS to Pengerang LNG (Two) Sdn Bhd’s (PLNG2) proposed Islamic Medium-Term Notes (IMTN) programme of up to RM3.0 billion. The rating outlook is stable.
PLNG2 owns a regasification terminal, Regasification Terminal Pengerang (RGTP), through which natural gas is supplied to the Pengerang Integrated Complex (PIC). It has a regasification capacity of up to 3.5 million tonnes per annum (mtpa) and has been operational since November 1, 2017.
The assigned rating incorporates PLNG2’s strategic position as the owner of the RGTP that was built primarily to serve PIC, its stable revenue generation under set tariffs for regasification services, the low demand risk through a long-term agreement with a related company within the Petroliam Nasional Berhad (PETRONAS) group, and its strong operating margins. The rating also benefits from rating uplift based on the strong support extended to PLNG2 within the PETRONAS group of companies including PETRONAS Gas Berhad (PGB) which has a 65% interest in the company. PETRONAS carries a AAA/stable rating from MARC based on public information. PGB is required to maintain at least a 51% stake in PLNG2 under the terms of the sukuk programme.
Proceeds from the initial issuance of approximately RM1.7 billion will be mainly used to refinance its USD-denominated shareholder loans equivalent to RM1.63 billion as well as fund the initial finance service reserve account deposit of RM48.6 million. There may be further drawdowns from the sukuk programme to pre-pay its USD-denominated jetty lease obligations and associated costs of about RM699.3 million (based on the book value as at end-1H2020).
MARC draws comfort from the predictability of PLNG2’s revenue stream under the Incentive-Based Regulation framework and a long-term terminal usage agreement with PETRONAS Energy & Gas Trading Berhad, which will fully underwrite the annual reserved firm capacity of RGTP until 2042. The rating agency also views the operational risk of RGTP to be low given the relatively straightforward operations of the terminal. Operations and maintenance is undertaken by a related company, Regas Terminal (Sg. Udang) Sdn Bhd, which has an excellent record of operating PETRONAS’ regasification terminal in Sungai Udang, Melaka, since 2013.
For 1H2020, PLNG2’s revenue stood higher at RM345.9 million (1H2019: RM275.3 million) on the back of a higher tariff rate for Regulatory Period 1 (2020-2022). Currently, PLNG2 is exposed to some earnings volatility owing to its USD-denominated obligations against its ringgit-denominated tariff. The currency volatility led to the profit margin declining to 29.0% in 1H2020 from 54.8% in 2019. MARC expects PLNG2’s profit margin to improve following issuance of the sukuk, which will reduce its exposure to USD-denominated borrowings.
Cash flow from operations (CFO) stood at RM315.1 million with CFO interest and debt coverage of 3.86x and 0.26x as at 1H2020. Its liquidity position remains robust with cash and bank balances of RM233.1 million. Its cash flow projections had assumed a total sukuk issuance of RM2.57 billion in line with the maximum debt-to-equity covenant of 4.00x. Under these projections, minimum and average pre-distribution finance service coverage ratios with cash remain strong at 2.71x and 3.35x. Capex requirement is projected to be minimal, totalling approximately RM253.5 million throughout the 20 years from the first sukuk issuance under the programme.
The stable outlook incorporates MARC’s view that PLNG2 will remain a strategic asset to the PETRONAS group and register profitability metrics that are commensurate with the rating band.
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