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

(Fitch Ratings - Jakarta - 05 Apr 2023)--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-'. The Outlooks are Stable. Fitch has also affirmed PGN's senior unsecured rating and the rating on the USD950 million 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)' with a Stable Outlook.

PGN's IDRs are one notch below those of its immediate parent, PT Pertamina (Persero) (BBB/Stable), based on our assessment of medium incentives for Pertamina to support PGN, under Fitch's Parent and Subsidiary Linkage Rating Criteria. PGN's National Ratings are also based on the same criteria. We continue to assess PGN's Standalone Credit Profile (SCP) at 'bb+'.

'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

Ratings Linked to Parent: We use a top-down approach to rate PGN, based on our assessment of 'Medium' legal, strategic and operational incentives of its parent, Pertamina, to support PGN. PGN is the sub-holding company for Pertamina's gas business, accounting for over 90% of distribution and 100% of transmission. Pertamina appoints the majority of PGN's board of directors and senior management. Its senior unsecured notes also include a cross-default provision with its material subsidiaries. Fitch believes this provision applies to most of PGN's debt.

Dominant Position in Indonesian Gas: PGN's 'bb+' SCP reflects its dominance in Indonesia's gas transmission and distribution sector. The company owns 92% of the natural gas (transmission and distribution) pipeline network in the country accounting for 90% of the gas distribution and 100% of the gas transmission volume.

Margin Compression: We expect the gas distribution spreads to compress further to USD1.62 per metric million British thermal unit (mmbtu) (2021: USD1.84/mmbtu, 2022E: USD1.67/mmbtu) over the next three years as demand picks up, raising the proportion of gas volumes sold at capped prices.

Regulations passed in April 2020 require PGN to cap selling prices to certain industries at USD6.0/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. The effective spreads have declined from around USD1.87/ mmtbu in 2020 & USD2.2/ mmbtu in 2019.

Regulatory Risks Constrain the SCP: Fitch believes that PGN faces further risks to margins because the state could increase the volume of gas sold under the capped pricing of USD6.0/mmbtu. PGN's distribution margins have been narrowing steadily since 2013, when they averaged over USD3.0/mmbtu. While there is no clarity yet on the extension of its capped gas price policy beyond 2024, Fitch has assumed its continuation beyond 2024, which drives our compressed spreads estimates.

Large Capex Plans: PGN plans to boost investment across its existing distribution and transmission businesses, and wishes to enhance downstream integration. This should drive up leverage over the medium term. Midstream and downstream investment plans are still in the preliminary stage, and could therefore be delayed or changed. We estimate consolidated capex at around USD450 million in 2023 (2021: USD222 million, 2022E: USD240 million) and range around USD800million to USD1.3billion from 2024.

Low Leverage: Fitch expects 2023 net leverage (net debt/EBITDA) (2021: 1.0x, 2022: 0.1x) to remain low, supported by higher earnings from the upstream business - benefiting from high oil prices and additional distribution volumes, despite narrower gas distribution spreads.

Fitch expects EBITDA of around USD900 million in 2023 (2021: USD788 million, 2022E: USD1 billion). We estimate net leverage remain below 0.5x by 2025 despite large capex plan, resulting in ample SCP headroom.

Improved Upstream Operations: The operating profile of PGN's wholly owned upstream subsidiary, PT Saka Energi Indonesia (B+/Stable), has improved, with proven reserve life increasing to move than six years as of end-2022 (2021 1P: 4.8 years). Saka's EBITDA should increase to about USD330 million in 2023 on high oil prices, and stay around USD250 million-300 million a year until 2025, with greater production due to higher reserves and lower long-term oil price assumptions. Fitch expects Saka to require PGN's support to repay its USD376 million notes due 2024.

Derivation Summary

PGN's ratings are notched below that of its parent, Pertamina, in line with Fitch's criteria. The one-notch difference reflects our assessment of medium incentives for Pertamina to support PGN. 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), based on PTT's high strategic and operational incentives to support PTTEP.

PTTEP plays an important part in supporting its parent's strategic role in Thailand's oil and gas sector and improving the country's security, and contributes about 50% of PTT's consolidated EBITDA. In contrast, PGN contributes around 10% of Pertamina's EBITDA, even though it is a leading player in Indonesia's natural gas transmission and distribution sector and covers 92% of the natural gas pipeline infrastructure in Indonesia.

Key Assumptions

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

- Gas distribution margin to remain around USD1.62/mmbtu from 2023 (2021: USD1.84/mmbtu, 2022:USD1.67) onwards

- Distribution volume to rise to 1,000 million standard cubic feet per day (mmscfd) in 2023, from around 914 mmscfd in 2022, and increase gradually to 1,172mmscfd by 2025

- Revenue of about USD140 million to USD160 million from 2023 onwards from the Rokan oil transportation pipeline

- Oil price of USD85/barrel (bbl) in 2023, USD75/bbl in 2024, USD65/bbl in 2025 and USD53/bbl thereafter, in line with Fitch's oil & gas price deck

- Natural gas sales prices as per contracted Indonesian production prices for the next three years; Henry hub price of USD3.5/ (thousand cubic feet) mcf during 2023 and 2024, USD3/ mcf in 2025 and USD2.75/ mcf thereafter, as per Fitch's oil & gas price deck (see 'Fitch Ratings Raises Short- and Medium-Term Oil & Gas Price Assumptions' ( https://app.fitchconnect.com/search/research/article/PR_10195863 )

- Oil and gas production of 31mboepd in 2023, 33mboepd in 2024, 37mboepd in 2025 and 40mboepd in 2026 (2021: 29mboepd, 2022 estimate: 33mboepd)

- Consolidated capex of USD450 million in 2023 (2022: USD241 million) and around USD800million to USD1.3billion from 2024

RATING SENSITIVITIES

Developments That May, Individually or Collectively, Lead to Positive Rating Action

- Positive action on its parent Pertamina, provided the Pertamina's incentive to support remain intact.

- Further strengthening of incentive to support by Pertamina.

Developments That May, Individually or Collectively, Lead to Negative Rating Action

- Negative rating action on Pertamina or weakening of Pertamina's incentive to support

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. Cash was around USD1.4 billion at end-2022. PGN had total consolidated debt of USD1.7 billion, including USD1.3billion in senior unsecured notes issued by PGN and Saka due 2024. The maturity schedule of its remaining debt is generally well spread out. PGN funding access with domestic and international banks benefits from its linkages with Pertamina

Issuer Profile

PGN, in which Pertamina owns 57%, is the leading player in Indonesia's natural gas transmission and distribution sector. The company has a 90% market share in gas distribution and 100% in gas transmission.

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 are notched down once from the ratings on its parent, Pertamina. Any change in Pertamina's ratings would result in a similar revision to PGN's ratings.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg. (ends)