View Credit Analysis Report (605266)

SubcategoryIndustrial Products - Oil and Gas
Date Article2020-10-05 00:00:00
MARC has assigned a 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 USD27.0 billion Pengerang Integrated Complex (PIC), Petroliam Nasional Berhad (PETRONAS)’s largest downstream investment project to date. 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 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. The support assessment considers the strong operational and financial linkages between PLNG2 and the PETRONAS group.

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 (FSRA) 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). Refinancing in ringgit reduces PLNG2’s currency risk. 

MARC draws comfort from the predictability of PLNG2’s revenue stream, as the tariffs for regasification services under the Incentive-Based Regulation (IBR) framework will cover the operational cost and working capital requirement as well as provide a fair return based on the company’s regulated asset base. Demand risk is mitigated through a long-term terminal usage agreement with a related company which will fully underwrite the annual reserved firm capacity of RGTP until 2042 regardless of the actual terminal utilisation rate. The rating agency also views the operational risk of RGTP to be low given the relatively straightforward operations of the terminal. Operations and maintenance (O&M) is undertaken by a related company Regas Terminal (Sg. Udang) Sdn Bhd (RGTSU), which has an excellent record of operating PETRONAS’ regasification terminal in Sungai Udang, Melaka, since 2013. RGTP recorded a terminal reliability rate of 99.9% in 2019.

For 1H2020, PLNG2’s revenue stood higher at RM345.9 million (1H2019: RM275.3 million) on the back of the higher tariff rate of RM3.485/GJ/day for Regulatory Period 1 (RP1) (2019 tariff rate: USD0.637/mmbtu/day, equivalent to approximately RM2.769/GJ/day). The new tariff rate includes internal gas consumption cost recovery, which was not part of the tariff previously. Additionally, the RP1 tariff also includes the jetty lease asset as part of PLNG2’s regulated asset base. Currently, PLNG2 is exposed to some earnings volatility, owing to its USD-denominated obligations against its ringgit-denominated tariff. The currency volatility in 1H2020 led to profit margin declining to 29.0% from 54.8% in 2019. MARC expects PLNG2’s profit margin to improve following the issuance of the sukuk, which will reduce its exposure to USD-denominated borrowings. In the past two years, profit margins have held steady in the 50%-60% range.

PLNG2’s cash flow from operations (CFO) stood at RM315.1 million as at 1H2020 while CFO interest and debt coverage stood at 3.86x and 0.26x. 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 (DE) covenant of 4.00x, the proceeds of which will be used for the repayment of USD-denominated shareholder loans, prepayment of jetty lease obligations and partial redemption of redeemable preference shares (RPS), subject to the terms of the sukuk. Under these projections, minimum and average pre-distribution finance service coverage ratios (FSCR) 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.

Major Rating Factors

Strategic importance to the PETRONAS group;
Predictability of revenue stream; 
Long-term agreement mitigates demand risk; and
Low operational risk.

Short operational track record.

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