Fitch Affirms Perusahaan Gas at 'BBB-'/'AA+(idn)'; Outlook Stable

(Fitch Ratings - Jakarta/Singapore - 08 Apr 2021)-- Fitch Ratings has affirmed Indonesia-based PT Perusahaan Gas Negara Tbk's (PGN) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) at 'BBB-'. The agency has also affirmed PGN's senior unsecured rating and the rating on its USD1.35 billion 5.125% bonds due 2024 at 'BBB-'. At the same time, Fitch Ratings Indonesia has affirmed PGN's National Long-Term Rating at 'AA+(idn)'. The Outlook is Stable.

PGN's IDRs are one notch below those of its immediate parent, PT Pertamina (Persero) (BBB/Stable), based on our assessment of the strong linkages between the two companies, according to our Parent and Subsidiary Linkage Rating Criteria. PGN's national ratings are also based on the same criteria.

PGN's Standalone Credit Profile (SCP) of 'bb+' reflects its dominant position in Indonesia and adequate financial profile. Its SCP also benefits from the stable earnings of its gas transmission business. The SCP is constrained by the regulatory uncertainty over its gas distribution margins and weak upstream operations. Fitch expects PGN's credit metrics to remain adequate for its SCP over our forecast horizon until 2025, with leverage ranging between 2.0x and 3.9x.

'AA' National Ratings denote expectations of a very low level of default risk relative to other issuers or obligations in the same country or monetary union. The default risk inherent differs only slightly from that of the country's highest rated issuers or obligations.

KEY RATING DRIVERS

Strong Linkages with Parent: We use a top-down approach to rate PGN due to the strong strategic and operational linkages with Pertamina, which has positioned PGN as the holding company for its down- and mid-stream gas assets. PGN accounts for over 90% of gas distribution and 100% of gas transmission in Indonesia. Pertamina's senior unsecured notes also include a cross-default provision, which applies to most of PGN's debt, resulting in moderate legal linkages.

Margin Pressure: Regulations passed in 2020 require PGN to cap its selling prices to certain industries at USD6/million British thermal unit (mmbtu), while the Indonesian government will ensure that PGN sources this gas (allocated gas) to these industries at between USD4.0/mmbtu and USD4.5/mmbtu. We estimate the effective spreads on PGN's gas sales have declined to around USD1.8/mmbtu since the implementation of the regulation in April 2020 under a presidential decree, from USD2.2/mmbtu in 2019.

Returning Excess Spread: PGN's distribution spreads in 9M20 were higher, averaging USD2.3/mmbtu, as it was able to sell the allocated gas not taken up by the allocated industries to other customers. PGN stated that the government has asked for a reconciliation of the costs from these volumes, which may result in it being required to return the difference between its allocated gas costs and usual gas costs. We estimate the reimbursement at around USD110 million and have adjusted the FFO net leverage to reflect this.

Rating Constrained by Regulatory Risks: Fitch believes PGN faces further risks to its margins as the state could increase the volume of gas sold under the capped pricing of USD6/mmbtu. In addition, the possibility of further margin shrinkage when PGN re-contracts most its gas sourcing agreements in 2023 remains. PGN's distribution margins have been declining steadily since 2013, when they averaged USD3.26/mmbtu.

Leverage to Increase: Fitch estimates PGN's FFO leverage increased to around 3.9x in 2020 from 2.2x in 2019. We estimate its adjusted EBITDA fell to about USD600 million in 2020, from USD987 million in 2019, after factoring in our assumption of USD110 million to be returned to the state, lower distribution volume, narrower distribution margins from April 2020, and considerably weaker upstream earnings in line with weak oil prices.

Fitch expects leverage of 3.2x in 2021 due to lower distribution spreads and our expectation that PGN will push some of the capex it curtailed in 2020 to 2021. We expect EBITDA to rise to USD680 million in 2021, mainly due to improving energy price assumptions at its upstream operations. Fitch expects a further improvement in EBITDA from 2022 as its Rokan oil pipeline starts operating, generating about USD100 million in EBITDA, according to PGN. Fitch expects PGN's leverage to improve from 2022 to less than 3x.

Weak Upstream Operations: The operating profile of PGN's wholly owned upstream subsidiary, PT Saka Energi Indonesia (B+/Negative), remains weak with proved reserves of 55 million barrels of oil equivalent, adequate for about four to five years of production. Fitch believes Saka's financial profile weakened in 2020 from 2019 due to lower-than-estimated production and lower oil prices.

We estimate Saka's EBITDA fell to about USD100 million in 2020, but will recover to over USD200 million a year until 2024. Fitch expects Saka to require PGN's support to repay its external debt - USD625 million in notes due 2024 - in light of its significantly weakened financial profile.

DERIVATION SUMMARY

PGN's ratings are notched below that of its parent, Pertamina, in light of the strong linkages between them, in line with Fitch's criteria. The one-notch difference reflects PGN's more modest role in comparison with Pertamina's upstream and downstream businesses. In comparison, PTT Exploration and Production Public Company Limited's (PTTEP; BBB+/Stable) ratings are equalised with those of its parent, PTT Public Company Limited (BBB+/Stable), due to the significant strategic and operational linkages between PTTEP's upstream oil and gas operations and the parent.

KEY ASSUMPTIONS

Fitch's Key Assumptions Within Our Rating Case for the Issuer

- Gas distribution margin of USD2.4/mmbtu in 2020, prior to factoring in the excess margin on gas not sold under allocated volumes that will be reimbursed to the state

- Gas distribution margins to decline to USD1.8/mmbtu in 2021 from USD2.2/mmbtu in 2019.

- Distribution volume to rise to 912 million standard cubic feet per day (mmscfd) in 2021, from 828mmscfd in 2020, and gradually increase to 990mmscfd by 2024.

- Revenue of about USD100 million starting 2022 from its Rokan oil transportation pipeline.

- Consolidated capex of USD300 million in 2020, increasing to USD616 million in 2021, and USD400 million per annum thereafter.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

- Positive action on its parent, Pertamina, provided the linkages between PGN and Pertamina remain intact.

- Further strengthening of linkages between PGN and Pertamina.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

- Negative rating action on Pertamina or weakening of linkages with Pertamina

BEST/WORST CASE RATING SCENARIO

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

LIQUIDITY AND DEBT STRUCTURE

Healthy Liquidity: PGN's liquidity is robust with over USD1.2 billion in cash at end-September 2020, and long-drawn-out debt maturities. PGN had total consolidated debt of USD2.6 billion, which included USD1,975 million in senior unsecured notes issued by PGN and Saka due 2024. The maturity schedule of its remaining debt is generally well-phased-out.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS

PGN's ratings notched down once from the ratings on its parent Pertamina. (ends)