Gas District Cooling (Putrajaya) Sdn Bhd - 10

MARC has affirmed its AAAID long-term rating on Gas District Cooling (Putrajaya) Sdn Bhd’s (GDC Putrajaya) RM300 million Al-Bai’ Bithaman Ajil Islamic Debt Securities (BaIDS). The rating outlook is stable. The rating reflects GDC Putrajaya’s position as the sole supplier of chilled water to all government premises in Putrajaya as well as the commercial buildings owned by Putrajaya Holdings Sdn Bhd (PJH), the relatively low operating risk associated with the district cooling facilities, the long-term offtake and gas supply agreement and the superior credit quality of its offtakers, namely the government of Malaysia and PJH. The rating also reflects the significant level of financial support provided by GDC Putrajaya’s immediate shareholder, PJH, and ultimate shareholder, the government-owned oil and gas conglomerate Petroliam Nasional Bhd (PETRONAS). The financial support in the form of advances and investment in preference shares from its sponsors has alleviated GDC Putrajaya’s still-weak credit metrics.

GDC Putrajaya owns five main district cooling plants, namely Plant 1, Plant 2, Plant 3, the Wisma Putra plant and the Putrajaya International Convention Centre (PICC) plant, all of which are located in Putrajaya, the Federal Administrative Capital of Malaysia. Its plants supply chilled water to both government premises and commercial buildings within the vicinity. Offtake is assured through long-term chilled water supply agreements entered into with the federal government and PJH. GDC Putrajaya is wholly-owned by PJH, which is co-owned by KLCC (Holdings) Sdn Bhd, a wholly-owned subsidiary of PETRONAS (64.41%), Khazanah Nasional Bhd (15.59%) and Kumpulan Wang Amanah Negara (20.00%). MARC maintains a long-term rating of AAA/Stable on PJH.

MARC’s analysis takes into account its monopolistic nature and assured ‘demand payments’ that must be made regardless of the offtake volume. During the financial year ended March 31, 2010 (FY2010), overall actual consumption levels by the offtakers surpassed the budgeted consumption level by 10.3%. Although Plant 2 and the Wisma Putra and PICC plants’ contracted demand are nearing their respective total capacity, total actual utilisation remains low with load factors still below 50%.

For FY2010, revenue grew by 8.4% to RM123.9 million with the offtake by the government accounting for 86.7% of total revenue while the remaining offtakers are commercial buildings owned by PJH. Operating profit declined to RM6.7 million (FY2009: RM8.5 million) due to the incurring of replacement and maintenance cost of RM5.0 million. Consequently, pre-tax losses increased to RM8.9 million (FY2009: RM6.34 million). Although revenue is  expected to increase on  account of a steady increase  in demand for chilled water and the likely tariff-hike adjustment in mid-2011, increasing utility and parts replacement costs mean that GDC Putrajaya will continually see its margins under pressure. Utility and parts replacement costs represent 44% of cost of revenue in the current financial year. Furthermore, a gradual transition to market prices of natural gas would negatively impact the profitability of GDC Putrajaya.

Despite the recurring annual pre-tax losses, GDC Putrajaya’s cash flow from operations has been sufficient to cover financing costs. Free cash flow declined to RM25.9 million (FY2009: RM27.3 million) due to an increase in capital expenditure totaling RM14.1 million. For the next five years, GDC Putrajaya’s projected annual capital expenditure averages around RM17.8 million. That said, MARC views that the resulting projected annual free cash flow of RM27 million together with the cash reserves may be sufficient to repay its third and fourth BaIDS instalments of RM50 million in December 2012 and December 2014 respectively. Nonetheless, MARC expects GDC Putrajaya’s immediate and ultimate shareholders to inject liquidity if necessary to help meet its BaIDS repayment obligations as demonstrated by the shareholders’ advance of RM44.2 million in FY2010.

The support available from its immediate and ultimate shareholders and their own strong credit standing mitigates the impact of recurring losses on GDC Putrajaya’s capital base and associated implications for gearing-related covenant compliance. GDC Putrajaya’s FY2010 facility annual finance service coverage ratio (AFSCR) of 3.37 times and debt-to-equity (DE) ratio of 38:62 currently provides some covenant headroom against its minimum covenanted AFSCR of 1.1 times and maximum DE ratio of 50:50.

The stable rating outlook reflects the structural protections under the BaIDS’ financial covenants and the expectation of adequate capital support from GDC Putrajaya’s immediate and ultimate shareholders which will continue to insulate BaIDS holders against uncertain cost recovery and cash flow implications.

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