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India Ratings Upgrades Petronet LNG to ‘IND AA+’/Positive

India Rating and Research (A Fitch Group company) -New Delhi-12 February 2013: India Ratings has upgraded Petronet LNG Ltd's (PLL) Long-term Issuer rating to 'IND AA+' from 'IND AA' while its Short-Term Issuer rating has been affirmed at 'IND A1+'. The Outlook on the Long-term rating is Positive.

The upgrade and Positive Outlook factor into PLL entering into long-term tolling arrangements for 4.75mmtpa of liquefied natural gas (LNG) with GAIL (India) Limited and Gujarat State Petroleum Corporation (GSPC) for its capacity enhancement at Dahej terminal to 15mmtpa from current 10 mmtpa on a 'use-or-pay' basis. With this PLL's Dahej terminal will have over 80% of its expanded capacity (15mmtpa) under long-term contracts.

As per this arrangement, PLL would provide GAIL and GSPC facilities for receipt, storage and re-gasification of LNG for contracted quantities without assuming responsibility for gas procurement. PLL would receive long-term advances under these tolling arrangements which would help partly fund the equity part of the capex. These contracts, along with its existing long-term sale and purchase agreements (LTSPA) with LNG suppliers and customers, provide stable cash flows over the contractual period and insulate the company from volatility in LNG prices or demand. As per LTSPA's terms, LNG prices are "pass-through’ and regasification charges to be paid by the customers are specified, with an annual escalation clause. The upgrade also factors in the mechanical completion of the Kochi terminal thereby removing the execution risk on this project.

PLL has a 7.5mmtpa supply contract for LNG with Rasgas for its Dahej terminal in Gujarat and a 1.44mmtpa supply contract with Australia Gorgon project for its completed, soon to be, commissioned 5mmtpa Kochi terminal (expanded from initial plans of 2.5 mmtpa). PLL has also entered into long-term gas sale contracts with Indian Oil Corporation (IOC), Bharat Petroleum Corporation Limited (BPCL) and GAIL, for 7.5mmtpa of its current operational capacity of 10mmtpa at Dahej and 1.44 mmtpa LNG purchase at Kochi terminal.

PLL's revenue grew by 72% yoy to INR226.9bn in FY12 with an operating EBIDTA of INR18.3bn (FY11: INR12.1bn). With total borrowing remaining similar to FY11 at INR32.7bn, higher operating EBIDTA brought about an improvement in leverage to 1.2x in FY12 from 1.6x in FY11. Though the company has significant capex plans over the medium term, higher operating cash flows due to optimum utilisation of capacities and favourable funding structure for capex would likely sustain the financial leverage at comfortable levels.

Key rating concerns stem from time and cost overrun risks on its expansion plans and the likelihood of delayed ramp up at the Kochi terminal post commissioning. Gas supply under the 1.44mmtpa long-term contract starts in 2015 thus PLL would need to utilise the Kochi capacity in the initial years with short-medium term contracts or on spot basis, which appear challenging given the delay in pipeline connectivity with end-users. Development of pipeline infrastructure and customers will happen in the medium-long term in the region.

Besides constructing a second jetty at Dahej terminal, PLL is also expanding the capacity at Dahej terminal through construction of additional storage and regasification facilities, and constructing a new 5mmtpa terminal in East Cost (Gangavaram, Andhra Pradesh). These capex plans are being executed at different locations and entail large scale thus exposing PLL to execution risks though mitigated by its track record of execution at Dahej and Kochi. India Ratings has not considered any project debt for Gangavaram terminal, which is being set up as an SPV, due to lack of clarity on terms of its financial closure.

PLL could be exposed to demand risk in case of new domestic gas discoveries; however, this is unlikely over the medium to long term due to production complexities faced by various gas exploration companies in India. Moreover, the on-going discussion on re-pricing domestic natural gas could reduce the price differential between domestic gas and imported LNG. Though PLL's gas price has become volatile due to its linkage with Japan Customs-cleared Crude, demand far outstrips domestic supply with the gap likely to widen which would lead to higher gas imports and demand for associated infrastructure. Thus, PLL has entered into tolling arrangements with other LNG importers to keep its capacities utilised besides sourcing LNG on spot basis. The pricing of LNG in relation to other alternatives would be instrumental for sustaining the long-term demand for LNG.


Positive: Future developments including ramp-up in utilisation of new facilities along with similar long-term supply and sales contracts or tolling agreements leading to significant deleveraging over the medium term may lead to positive rating action.

Negative: Future developments such as unexpected debt-funded capex or sustained low utilisation of facilities leading to higher-than-expected leverage or a change in existing contractual structure could cause the Outlook to be revised back to Stable.

Incorporated in 1998, PLL imports LNG, stores and regasifies it at Dahej terminal, 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%. During 9MFY13, PLL reported revenue of INR230bn, up 40.9% yoy, and an EBITDA of INR15bn, up 8% yoy, respectively.

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