(The following statement was released by the rating agency)
March 20 - Fitch Ratings has affirmed India-based Petronet LNG Ltd’s (PLL) National Long-Term rating at ‘Fitch AA(ind)’ with a Stable Outlook and its National Short-Term rating at ‘Fitch A1+(ind)'.
The ratings are supported by PLL’s long-term assured-quantity liquefied natural gas (LNG) purchase contracts and back-to-back NG sales agreements, providing stable cash flows over the contractual period and insulating the company from volatility in LNG prices. PLL has a 7.5mmtpa LNG purchase contract with Rasgas for its Dahej terminal in Gujarat and a 1.44mmtpa LNG purchase contract with Australia Gorgon project for its under-construction 5mmtpa Kochi terminal (initial capacity of 2.5 mmtpa). PLL has back-to-back NG sales agreements for both these purchase contracts with Indian Oil Corporation (IOC, ‘BBB-'/Stable), Bharat Petroleum Corporation Limited (BPCL) and GAIL (India) Limited (GAIL, ‘BBB-'/Stable).
As per the terms of contracts, LNG prices are pass-through, and regasification charges are specified with an annual escalation clause. To utilise its Dahej capacity, the company is planning to sign up 4.75 mmtpa long-term tolling agreements with its customers on the ‘use-or-pay’ basis, under which PLL would provide them facilities for receipt, storage and re-gasification of LNG for contracted quantities without assuming the responsibility for gas procurement.
PLL’s revenues grew by 23.9% yoy to INR131.9bn in FY11 (financial year ending March) with an EBIDTA of INR12.1bn (FY10: INR8.4bn). Though total borrowings increased because of its ongoing capex plans to INR32.1bn in FY11 from INR25bn in FY10, higher operating EBIDTA led to financial leverage improving to 1.6x from 2.0x, during the same period. However, its significant capex plan over the medium term would increase its financial leverage; though it will remain consistent with its current ratings.
The rating concerns stem from time and cost overrun risks on its expansion plans and under-utilisation of the Kochi facility during the initial years after its commissioning in September 2012. Gas supply under the 1.44mmtpa long-term contract starts in January 2015, and covers 58% of initial planned and 29% of expanded capacity. PLL would need to utilise the Kochi capacity in the initial years, with short-medium term contracts or on spot basis.
Besides the ongoing capex, PLL has announced further expansion plans for Dahej and a new terminal in East Cost (Gangavaram, Andhra Pradesh). Fitch will assess the impact of this new terminal once the project is finalised. The agency notes that these capex plans would be executed at different locations and would entail large scale, thus exposing PLL to execution risks; however, PLL has an eight-year track record of execution capabilities without any significant time and cost variations since start of operations in 2004.
PLL could be exposed to demand risks in case of new low-cost domestic gas discoveries or production ramp-up. The price of domestic NG is significantly lower than for LNG due to the regulated pricing mechanism; LNG prices are linked to international prices and also carry additional transport and regasification charges. Moreover, PLL’s gas prices have been aligned with 60-month average Japanese Crude Cocktail (JCC) prices from 31 December 2008 onwards, which has increased the cost of imported LNG and made it volatile. However, a drop in production from KG D6 and increasing demand for NG have provided significant opportunities for imported LNG. However, pricing of LNG in relation to other alternatives would be instrumental for sustaining its long-term demand.
Positive rating guidelines include timely commissioning of the current expansion plans along with securing long-term supply and sales contracts or tolling agreements leading to a sustained reduction in net adjusted financial leverage to below 1.5x. Low utilisation of new facilities, time or cost overruns in its expansion plans or new debt-funded plans leading to net financial leverage exceeding 3x or an adverse change in the existing contractual structure could have a negative impact on the ratings.
Incorporated in 1998, PLL imports, stores and regasifies LNG, and sells the resulting NG to its customers. PLL is a JV between public sector entities - ONGC, GAIL, IOC and BPCL - each with an equity stake of 12.50%. Besides building a second terminal, it is ramping up the nameplate capacity of its existing Dahej terminal in a phased manner to 15 mmtpa by end-FY16. During 9MFY12, PLL reported revenues of INR163.2bn and an EBITDA of INR13.9bn, registering yoy growth of 77.1% and 60.5%, respectively.