MARC AFFIRMS ITS AAAID RATING ON GAS MALAYSIA’S AL-MURABAHAH MTN PROGRAMME

Nov 28, 2013 -

MARC has affirmed its AAAID rating on Gas Malaysia Berhad’s (Gas Malaysia) RM500 million Al-Murabahah Medium Term Notes (MTN) programme with a stable outlook. The affirmed rating reflects the natural gas utility’s fairly diverse industrial, residential and commercial customer base, adequate natural gas supply from national oil and gas company Petroliam Nasional Berhad (PETRONAS), and very strong financial profile with zero debt leverage and robust liquidity. At the same time, the rating agency takes cognisance of regulatory pressures to maintain the gas utility’s regulated natural gas tariffs at a low level and the potential for intermediate to longer term credit pressures posed by delays in tariff adjustments.

MARC opines that the stability of Gas Malaysia’s long term financial profile and therefore, its overall credit quality hinges to a large extent on the continuity of its ability to mitigate its exposure to an unrecoverable increase of natural gas procurement costs and to sufficiently recover the costs of its capital investments in gas pipeline expansions through adequate tariff levels. Gas Malaysia’s profitability is sensitive to the spread between the gas utility’s regulated tariffs and its gas purchase price. While the utility’s long-term gas supply agreement with PETRONAS currently allows it to purchase up to 382 million standard cubic feet per day (mmscfd) of natural gas at a subsidised price, PETRONAS will reduce its allocation to Gas Malaysia to 300 mmscfd from August 1, 2014. MARC believes this will increase the gas utility’s exposure to the negative spread between natural gas tariffs (which have remained unchanged since June 2011) and spot gas prices.

Licensed under the Gas Supply Act 1993, Gas Malaysia is the sole distributor of piped natural gas to users that consume 5 mmscfd and below in Peninsular Malaysia. The company also sells liquefied petroleum gas under a second licence, but revenue contribution from LPG sales is minimal. Gas Malaysia owns and operates a network comprising about 1,800 km of pipelines through which it distributes natural gas from the Peninsular Gas Utilisation system to a diversified base of industrial, commercial and residential users. Gas Malaysia spent about RM39.7 million in 2012 to broaden its gas pipeline network and another RM48.6 million in the first half of 2013 (1H2013). MARC estimates that Gas Malaysia sold about 343 mmscfd of natural gas in 2012. While natural gas supply is assured for up to 492 mmscfd under the long-term gas supply agreement with PETRONAS, the utility is required to pay the market price for the additional gas purchases over 300 mmscfd effective August 1, 2014. MARC notes that the current tariff levels are not conducive to business growth.

For 1H2013, Gas Malaysia’s revenue and pre-tax profit rose to RM1.1 billion and RM111.0 million respectively (1H2012: RM1.0 billion; RM100.2 million) attributed to higher sales volume. The company sold 67.5 million British thermal units (mmBtu) of natural gas in 1H2013, higher than 62.1 mmBtu in the previous year’s corresponding period. The company’s operating profit margin remained substantially unchanged at 9.4% (1H2012: 9.3%).

Gas Malaysia’s cash flow from operations increased to RM111.8 million for 1H2013 (1H2012: RM107.3 million) in line with better pre-tax profit. Free cash flow, however, was negative RM35.6 million (1H2012: -RM7.3 million) mainly due to higher capital spending and dividend payments. With manageable capital commitments of RM209.9 million as at end-June 2013, a debt-free capital structure as well as cash and cash equivalents of RM314.1 million and available credit facilities amounting to RM522.5 million, the gas utility’s liquidity position and financial flexibility are expected to remain favourable.

The stable outlook incorporates MARC’s expectations that Gas Malaysia’s business and financial risks will remain low over the next 12 to 18 months, a key driver of which will be the developments pertaining to domestic gas prices.

Contacts:

Se Tho Mun Yi, +603-2082 2263 begin_of_the_skype_highlighting +603-2082 2263 FREE  end_of_the_skype_highlighting / munyi@marc.com.my;

Sharidan Salleh, +603-2082 2254/ sharidan@marc.com.my.