MARC affirms Gas Malaysia Distribution’s RM1b debt notes

KUALA LUMPUR: Malaysian Rating Corporation (MARC) has affirmed its ratings on Gas Malaysia Bhd’s unit -- Gas Malaysia Distribution Sdn Bhd’s (GMD) -- debt notes of up to RM1bil while the outlook is stable.

The rating agency said on Wednesday it affirmed its AAA IS/MARC-1 IS ratings on GMD’s Islamic medium-term notes (IMTN) programme and Islamic commercial papers (ICP) programme.

MARC said the key rating driver for GMD is its’ stable revenue generation from distributing natural gas in Peninsular Malaysia through the natural gas distribution system (NGDS) which it owns and provides a near-monopolistic position.

The rating is also supported by the incentive-based regulation (IBR) framework under which revenue risk is mitigated.

GMD’s natural gas distribution was impacted by movement restrictions which weighed on customer demand, leading to about 205.2 million MMBtu of total gas volume distributed in 2020, 7.3% lower than forecast.

It received lower tolling fee revenue of RM385.1mil (forecast: RM415.6mil).

MARC said however, under the IBR framework, GMD was able to recover about RM31.1mil in revenue under-recovery through an upward adjustment of its average distribution tariff to RM2.05 per MMBtu for the period between April 1 and Dec 31, 2021, from RM1.88 per MMBtu previously.

GMD posted pre-tax profit of RM209.8mil with a strong operating profit margin of 53.6%.

It also registered strong cash flow from operations (CFO) of RM214.2mil with healthy CFO interest and debt coverages of 16.63 times and 0.51 times.

Its debt-to-equity ratio stood at 0.30 times as at end-2020 and is expected to rise to about 0.44 times by 2025 as the group increases its borrowings to undertake a capex programme to increase its regulated base.

“This may apply pressure on free cash flow (FCF) generation, which was negative RM60.9 million in 2020. As GMD realises its plan, the rating agency expects the group to maintain its debt metrics within forecast; any sharp deviation may trigger rating pressure,” it said.

MARC said in 2020, total capex of RM171.1mil accounted for 89.8% of planned capex with the unutilised portion carried forward to 2021.

In the event the actual capex is lower than planned capex in Regulatory Period 1 (RP1: 2020–2022), GMD’s opening regulated asset base in RP2 (2023–2025), which partly determines regulated return, will be lower than projected.

GMD was granted a 20-year distribution licence which allows it to take up the role as a gas distributor through its 2,600km of natural gas distribution system (NGDS) throughout Peninsular Malaysia.

GMD will also develop, operate and maintain the NGDS to ensure the safe and reliable delivery of gas to customers across Peninsular Malaysia.