Moody’s: Kogas unaffected by Mozambique LNG investment

South Korea’s Kogas’ credit quality will not be immediately affected by its decision to invest in the Area 4 Coral South floating liquefied natural gas (FLNG) project in Mozambique, according to Moody’s Investors Service.

On 18 January, Kogas’ board of directors approved an investment in the FLNG project, subject to a final investment decision by all the project partners.

The project is to develop and produce natural gas from Area 4 of the Coral gas field, which is 10% owned by Kogas, after completion of exploration. The remaining stake is owned by Eni East Africa (70%) — which is in turn held by the operator Eni and China National Petroleum Corporation — and other partners (20%).

If the project goes ahead, Kogas will invest $513 million in the FLNG project through KG Mozambique Ltd, its 100%-owned subsidiary, from 2017 to 2022, and guarantee up to $640 million of the project’s debt funding.

The FLNG facility aims to start commercial operations from 2022 with a target production volume of around 3.4 million tons per annum for 25 years.

“The investment is of a manageable size and is unlikely to signal an aggressive expansion by Kogas in exploration and production projects overseas,” said Mic Kang, a Moody’s Vice President and Senior Analyst.

The investment and debt guarantee will have minimal impact on Kogas’ financial profile, because they will be spread out over the next five years, and because a large portion of the investment is already accounted for in Moody’s projected capex of KRW2-3 trillion per annum over the next 2-3 years, the rating agency said.

Moody’s expects Kogas’ funds from operations (FFO)/debt and FFO/interest cover will stay at 6%-8% and 3.0x-3.5x over the next 12-18 months, slightly up from 5%-7% and 2.5x-3.0x in 2015-16, owing to increasing operating cash flows from its core domestic gas utility business.

Execution risk associated with the FLNG project, such as project delays and cost overruns, which are common to infrastructure projects, will likely remain manageable, because, as a minority shareholder, any additional investment required from Kogas should be small relative to its overall operating cash flows. Its regulated domestic gas utility business will allow the company to accommodate such additional investment and generate sustainable cash flow, Moody’s said.

In addition, Moody’s expects project risk will decrease once the FLNG facility is completed, particularly because the binding agreement with BP, which is conditional on the FID by all project partners, will cover the sale of all LNG produced at the FLNG facility for a period of over 20 years.

Moody’s believes that Kogas will take a prudent approach to other investments in overseas projects over at least the next two to three years, owing to the Korean government’s tight supervision over its financial health under the mid- to long-term financial management plan.

Listed on the Korea Stock Exchange, Kogas was 55% owned by the Korean government — directly and indirectly through Korea Electric Power Corporation and local governments — at 30 September 2016.