MARC Ratings has affirmed its rating of AAA_IS on Pengerang LNG (Two) Sdn Bhd’s (PLNG2) Islamic Medium-Term Notes (IMTN) programme of up to RM3.0 billion. The rating outlook is stable. The programme has an outstanding amount of RM1.6 billion as at end-August 2022.

The affirmed rating reflects the sizeable and predictable revenue from PLNG2’s regasification services under the Incentive-Based Regulation (IBR) framework, and the mitigation of demand risk under its long-term usage agreement with related company PETRONAS Energy & Gas Trading Sdn Bhd (PEGT), a wholly-owned subsidiary of Petroliam Nasional Berhad (PETRONAS) (AAA/Stable rating based on publicly available information). MARC Ratings has incorporated a two-notch rating uplift based on the strong support extended to PLNG2 by the PETRONAS group of companies, and the strong operational and financial linkages between them. PETRONAS Gas Berhad (PGB) has a 65% interest in PLNG2 with the remaining held by Dialog Group Berhad (indirectly with 25%) and the Johor State Government (indirectly with 10%).

In 1H2022, PLNG2 recorded regasification revenue of RM342.8 million and forecast to achieve revenue of RM691.3 million for full year 2022 based on the firm capacity reserved by PEGT. Operating profit was RM177.0 million while operating profit margin remained strong at 50.5% in 1H2022, although this declined from 62.8% in 2021 due to the impact from the weak ringgit against the US dollar. This had resulted in foreign exchange loss of RM26.7 million in 1H2022, mainly due to a translation loss of US dollar jetty lease liability; the lease stood at USD122.7 million (equivalent to RM540.2 million) and constituted 25% of total borrowings as at end-June 2022. 

PLNG2 is finalising its annual revenue requirement (ARR) for the next regulatory period (2023-2025) by end-2022. Assuming all other factors remain unchanged, the ARR could be slightly lower, reflecting a lower regulated asset base (regasification terminal) after considering depreciation; regulated assets are a key factor in determining ARR under the IBR framework. The IBR framework provides sufficient revenue to cover costs and return to the company.

In 1H2022, cash flow from operations (CFO) was strong at RM288.1 million with CFO interest and debt coverages of 6.41x and 0.23x. Debt-to-equity (DE) ratio rose to 3.67x (covenant: 4.0x) mainly due to an increase in jetty lease liability due to the appreciation of the US dollar. In addition, equity declined following the redemption of redeemable preference shares (RPS) amounting to RM370.7 million. MARC Ratings does not envisage PLNG2 to raise additional borrowing as capex requirement is relatively small and sufficiently covered by internal liquidity. Cash balances remained healthy at RM176.1 million as at end-June 2022.

In 1H2022, the ultimate parent PETRONAS recorded higher pre-tax profit of RM64.2 billion (1H2021: RM30.3 billion) on the back of higher revenue of RM172.1 billion (1H2021: RM109.6 billion). The financial improvement was a result of higher crude oil prices during the period. The high oil price environment, which stood at USD96.5 per barrel as at end-August 2022, will support PETRONAS’ capex plan. In 1H2022, the group spent higher capex of RM18.9 billion (1H2021: RM12.7 billion).

The stable outlook reflects MARC Ratings’ expectations that PLNG2 will remain a strategic asset to the PETRONAS group and register profitability metrics that are in line with forecasts.

Upgrade in the standalone rating is unlikely in the near term. Any upgrade will be underpinned by marked and sustained improvement in leverage position.

The standalone rating could come under pressure in the event of an unexpected deterioration in the financial performance and/or weakening support from PETRONAS group.