Fitch affirms Perusahaan Gas Negara at 'BBB-'/'AAA(idn)'; outlook stable

(Fitch Ratings-Singapore/Jakarta-21 April 2015) -- 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, including the rating of 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.

Strong Financial Profile: Fitch expects PGN's credit metrics to weaken over the medium term due to a decline in margins, slow volume growth and elevated capex. However, we expect the company to maintain a credit profile appropriate for its standalone 'BBB' rating level, with funds flow from operations (FFO) to adjusted debt remaining below 4.0x. PGN's IDR is constrained by the rating on the Republic of Indonesia (BBB-/Stable) because the government owns 57% of the gas distribution company.

Likely Decline in Margins: PGN's gas distribution margin, which is a key determinant of its operating cash generation, has been robust at USD3.5-4 per million British thermal units (mmbtu). However, we believe margin is likely to be lower in 2015 and beyond due to a lack of further cheap pre-paid gas volumes, a weaker Indonesian rupiah against the US dollar, likely lower margins on R-LNG (regasified liquefied natural gas) sales compared with piped gas, and lower earnings from surcharges levied on customers for using gas above their contracted volumes.

Slow Sales of R-LNG: R-LNG is the primary source of incremental gas supply for PGN, but the company has faced difficulty selling this form of gas due to its higher cost compared with piped gas from fields in Sumatra and Java. Piped gas supply could shrink due to maturing fields and delays in development activity. We believe R-LNG sales pick-up is likely to be slow. Consequently, PGN's distribution volume growth over the next few years would be limited to the low single-digits.

Sustained High Capex: PGN's investments picked up in 2013-14 to USD1.4bn in 2014 from USD160m in 2012, driven mainly by upstream acquisitions. Capex was also undertaken to enhance gas infrastructure in Indonesia, such as the development of the Lampung R-LNG network in South Sumatra. We expect the pace of investments to be sustained, with spending needed to continue gas infrastructure projects to support Indonesia's policy of increasing gas usage and development of its upstream assets.

Regulatory Risks: PGN is susceptible to regulatory intervention aimed at its influence in Indonesia's gas market. Among these is the long-standing issue of granting open-access to its distribution pipelines, which could impact PGN's business. 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. (ends)