GAS DISTRICT COOLING (PUTRAJAYA) SDN BHD - 2017

MARC has affirmed its AAA_IS rating on Gas District Cooling (Putrajaya) Sdn Bhd’s (GDC Putrajaya) RM300 million Al-Bai’ Bithaman Ajil Islamic Debt Securities (BaIDS) with a stable outlook.

The rating affirmation factors in a three-notch rating uplift for parental support from Putrajaya Holdings Berhad (PJH) on which MARC maintains a long-term credit rating of AAA/stable. The support assessment considers GDC Putrajaya as a strategic wholly-owned subsidiary of PJH given the company’s specific role as the sole supplier of chilled water in Putrajaya and past evidence of financial support extended by the parent.

On a standalone basis, GDC Putrajaya’s credit profile reflects its strong competitive position and steady revenue stream generated under long-term offtaker agreements. However, profitability remains weak due to increasing operating costs, mainly attributed to the lack of a cost pass-through mechanism. Under the agreements, GDC Putrajaya receives demand charges irrespective of offtake volumes and variable charges based on the actual quantity of chilled water delivered. The demand charges have continued to provide GDC Putrajaya with a steady revenue stream, accounting for 70% of GDC Putrajaya’s revenue of RM104.6 million in 1H2017. The company’s profitability, however, has come under pressure since the implementation of the gas subsidy rationalisation in 2H2015. Given the absence of a fuel cost pass-through mechanism in the offtake agreements, GDC Putrajaya has had to absorb a significant increase in gas costs.

For 2016, pre-tax profit declined by 70.7% y-o-y to RM3.3 million but increased to RM15.4 million in 1H2017 following a hike in chilled water tariffs in January 2017; the tariffs are scheduled to increase by 9% every three years. MARC understands that despite the tariff hike, the utility costs of chilled water production remained higher than the variable charge rate to the government. Given the rapid increases in gas price, estimated at 16% and 14% in 2017 and 2018 respectively, GDC Putrajaya’s earnings would continue to be pressured unless it achieves a meaningful outcome in negotiations with the government to restructure the chilled water tariffs.

As at end-June 2017, GDC Putrajaya’s borrowings comprised solely of the outstanding RM100.0 million under the rated BaIDs. Its debt-to-equity ratio stood low at 0.26x while cash flow from operations (CFO) was a modest RM13.4 million. In the near term, CFO could weaken in line with lower earnings expectations; however, the company’s liquidity position as reflected by the cash balance of RM83.5 million is more than sufficient to meet the debt repayment of RM50.0 million on December 4, 2017. The final repayment of RM50.0 million falls due on December 2, 2022, providing ample time for GDC Putrajaya to build up its cash reserves.

The stable outlook is underpinned by MARC’s expectation that PJH will continue to offer GDC Putrajaya financial support in relation to the BaIDS debt obligations. Downward rating pressure could be triggered if there is a material change in the support assumption and/or if GDC Putrajaya’s credit profile significantly weakens.

Major Rating Factors

Strengths

• Sole supplier of chilled water in Putrajaya;
• Contracted demand charges cover fixed operating and financing costs; and
• Strong credit profile of its parent Putrajaya Holdings Berhad.

Challenges/Risks

• Absence of fuel cost pass-through mechanism in the offtake agreements.