Fitch Ratings-Singapore/Jakarta-19 April 2016: Fitch Ratings has affirmed Indonesia-based PT Perusahaan Gas Negara Tbk’s (PGN) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at ‘BBB-‘ and its National Long-Term Rating at ‘AAA(idn)’. The Outlook is Stable. Fitch has also affirmed PGN’s senior unsecured rating and the rating on its USD1.35bn bonds due 2024 at ‘BBB-‘.
‘AAA’ National Ratings denote the highest rating assigned by the agency in its National Rating scale for that country. This rating is assigned to issuers or obligations with the lowest expectation of default risk relative to all other issuers or obligations in the same country.
KEY RATING DRIVERS
Financial Profile Weaker, Still Robust: PGN’s FFO-adjusted net leverage deteriorated to 2.5x in 2015 (2014: 0.6x) due to a sharp decline in distribution spread and volumes. Fitch does not expect PGN’s credit metrics to further worsen materially over 2016-2017 even though some risks remain. We estimate the company’s financial leverage will increase slightly to around 2.7x by 2017, based on our assumptions of a moderate growth in volumes and a further decline in spread. However, we believe PGN’s credit metrics will remain appropriate for its standalone ‘BBB’ rating. PGN’s IDR is constrained by the rating of the Republic of Indonesia (BBB-/Stable) because the government owns 57% of the company.
Volumes Likely to Rebound: PGN’s gas distribution volumes fell 7% to 802mmcf/d in 2015, hit by weak industrial demand. There are signs of a moderate pick-up in the economic sentiment in Indonesia. The Nikkei manufacturing PMI for March 2016 rebounded to 50.6, the first expansionary reading since September 2014. We assume PGN’s volumes would grow by 5% annually, with increasing contribution from regasified LNG (R-LNG).
Use of R-LNG in Indonesia has been minimal because its oil-linked price is higher compared with piped gas. However, with the sharp fall in oil prices, the price gap is much narrower. PGN now plans to blend R-LNG with piped gas, instead of seeking separate contracts. The fall in oil prices has also lowered the costs of gas substitutes such as fuel oil and diesel, reducing the attractiveness of using gas. This is a risk to PGN’s volume growth projections. However, Fitch expects a recovery in oil prices as the market gradually balances over time.
Spread Should Shrink Further: PGN’s gas distribution spread, a key determinant of its operating cash generation, declined to USD3.4 per million British thermal unit (mmbtu) in 2015, from USD3.7/mmbtu in 2014. The decline was due to a weaker Indonesian rupiah against the US dollar and the lack of cheap prepaid gas volumes in 2015. Around 20% of the company’s realised sales revenue is in rupiah, with the rest in dollars, but its gas purchase costs are entirely in dollars. This exposes PGN’s spread to currency risks. We expect PGN’s spread to decline further based on increasing R-LNG volumes in the sales mix and a gradual recovery in oil prices, which would raise its blended gas cost.
Sustained High Capex: PGN’s capex (including acquisitions) has risen over the last three years to an average of USD1.3bn in 2014-2015 from less than USD200m in 2012. This was driven by the acquisition of upstream assets and investment in the domestic gas infrastructure. We expect PGN’s capex to remain relatively high at around USD1bn each in 2016 and 2017, as the company continues to focus on expanding the pipeline infrastructure and developing its upstream asset base. If PGN makes further upstream acquisitions, its spending could be higher, and present a risk to our leverage estimates.
Regulatory Risks: PGN is susceptible to regulatory interventions aimed at restricting its influence in Indonesia’s gas market. While PGN’s standalone credit profile of ‘BBB’ incorporates general regulatory risks in Indonesia, a regulatory development that materially impacts PGN financial profile will be treated as an event risk.