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

(Fitch Ratings - Singapore/Jakarta - 22 Mar 2024)--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 USD396 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 assess PGN's Standalone Credit Profile (SCP) at 'bb+'/ 'aa(idn)'.

'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 for 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 volume. Pertamina appoints the majority of PGN's directors and senior managers. 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 business profile benefits from 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.

Margin Compression: We estimate PGN's gas distribution spreads will remain compressed at USD1.60 per metric million British thermal unit (mmbtu) (2022: USD1.94/mmbtu, 2023E: USD1.76/mmbtu) over the next three years as a pick-up in demand will raise the proportion of gas volume sold at capped prices.

Regulations passed in April 2020 require PGN to cap selling prices to certain industries at USD6.0/mmbtu. We estimate PGN's gas distribution margin to be affected by the higher cost of gas from new gas supply contracts with Pertamina and PT Medco Energi Internasional Tbk (B+/Positive). The effective spreads have declined from around USD1.87/mmbtu in 2020 and USD2.20/mmbtu in 2019.

Regulatory Risks Constrain SCP: PGNs SCP is constrained by the regulatory risk for the gas distribution and transmission business in Indonesia. Any regulatory changes can significantly impact PGN profitability. PGN's distribution margins have been narrowing steadily since 2013, when they averaged over USD3.0/mmbtu; sale of gas under the capped pricing of USD6.0/mmbtu to certain industries as directed by the state impacted PGN's distribution spreads in the last four years.

Any increase in gas volumes sold at capped prices can led to further pressure on distribution spreads. In the absence of clarity on the extension of the capped gas price policy beyond 2024, Fitch has assumed its continuation beyond 2024, which drives our compressed spread estimates.

Rising Capex Plans: We estimate an increase in consolidated capex to USD319 million in 2024 (2022: USD133 million, 2023: USD122 million) before reaching a range of USD800 million to USD1 billion yearly, up to 2027. PGN plans to boost investment across its existing distribution and transmission businesses, and enhancement in downstream integration. Midstream and downstream investment plans are still in the preliminary stages and could therefore be delayed or changed. We expect EBITDA net leverage to rise gradually.

Low Leverage: Fitch expects PGN to remain in a net cash position in 2024 (2022: 0.2x, 2023: net cash), supported by higher earnings from the upstream business benefitting from high oil prices despite narrower gas distribution spreads. Fitch expects EBITDA of around USD1.1 billion in 2024 (2023: USD956 million, 2022: USD1.1 billion). We estimate net leverage will remain below 0.5x by 2026 despite the plan to increase capex, 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 (1P) life increasing to more than six years by end-2022 (2021 1P: 4.8 years). We estimate Saka's EBITDA increased to about USD330 million in 2023 on high oil prices, and will stay around USD250 million-300 million a year until 2026, driven by rising production aided by healthy reserve accretion in 2023. Fitch expects Saka to have sufficient internal cash to repay its USD156 million notes due May 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, PT Pertamina Hulu Energi's (PHE) IDR is rated at its SCP of 'bbb', which is on a par with the IDR of its parent Pertamina. PHE's IDR would be equalised with Pertamina's 'BBB' even if its SCP weakens below 'bbb', reflecting our assessment of the parent's high legal, strategic and operational incentives to support the subsidiary in accordance with Fitch's PSL Criteria.

PHE is key for the nation's O&G security as it contributed 68% of the nation's total domestic oil production and 32% of gas production. PHE's legal incentive is assessed at 'High' because it is the largest subsidiary of Pertamina and it is clear that it qualifies as Pertamina's key principal subsidiary, compared to PGN, which is scored at 'Medium'. Strategic incentive is scored at 'High' because PHE contributes about 90% of Pertamina's EBITDA and provides high competitive advantage to Pertamina's key role for the nation's energy security.

On the contrary, PGN contributes around 10% of Pertamina's EBITDA and is expected to play an important role in Indonesia's renewable energy transition over the medium to long-term. Lastly, PHE is also scored 'High' for operational incentive because it operates in the critical upstream segment compared to relatively moderate operational synergies of PGN with Pertamina.

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), should PTTEP's SCP weaken below its parent's ratings, 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 energy security, with a contribution of 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 USD1.6/mmbtu from 2024 (2022: USD1.94/mmbtu, 2023: USD1.76/mmbtu)

- Distribution volume to rise above 1,000 million standard cubic feet per day (mmscfd) in 2024, from around 923mmscfd in 2023, before increasing gradually to 1,057mmscfd by 2026

- Revenue to rise gradually from USD400 million to USD700 million between 2024 and 2026 from the LNG trading business

- Oil price of USD80/barrel (bbl) in 2024, USD70/bbl in 2025, USD65/bbl in 2026 and USD60/bbl thereafter, in line with Fitch's oil and gas price deck (see text)

- Natural gas sales prices as per contracted Indonesian production prices for the next three years; Henry hub price of USD2.25/thousand cubic feet (mcf) from 2024, as per Fitch's oil and gas price deck (see 'Fitch Ratings Cuts Short-Term Oil & Gas Price Assumptions, Oil Prices Unchanged')

- Oil and gas production of 33mboepd in 2024, 37mboepd in 2025 and 40mboepd in 2026 (2021: 29mboepd, 2022: 33mboepd, 2023 estimate: 30mboepd)

- Consolidated capex of USD319 million in 2024 (2023: USD122 million) and USD700 million-1 billion from 2025

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade:

- Positive action on Pertamina, provided the parent's incentive to support remains intact;

- Further strengthening of Pertamina's incentive to support.

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade:

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

Liquidity and Debt Structure

Healthy Liquidity: PGN's liquidity is robust as it is in a net cash position. Cash was around USD1.24 billion at end-2023, while total consolidated debt of USD1.115 billion, including USD553 million in senior unsecured notes issued by PGN and Saka due in May 2024. The maturity schedule of its remaining debt is generally well spread out. PGN's funding access with domestic and international banks benefits from its linkages with Pertamina.

Issuer Profile

PGN, 57%-owned by Pertamina, is the leader in Indonesia's natural gas transmission and distribution sector, with 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

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores. (ends)