Fitch: Affirms PGN at 'BBB-'/'AAA(idn)'; outlook stable
Wednesday, August 15 2012 - 02:43 AM WIB
PGN's ratings are constrained by the ratings of its 57% majority shareholder, the republic of Indonesia ('BBB-'/Stable). The company's ratings also reflect its dominant market position in natural gas (NG) distribution, resultant strong pricing power and its very strong financial profile.
The cost of PGN's gas purchases are rising. About 60% of PGN's NG requirements are to be re-priced at USD5.4/million British thermal units (mmbtu) by Q12013 from USD1.9/mmbtu. This follows price negotiations by two of its key suppliers on legacy contracts. Fitch, however, expects PGN's gross profits per unit to be largely unaffected (USD3.9/mmbtu in 2011) due to its market position and its ability to negotiate with its industrial customers. About 98% of PGN's revenues are derived from industrial and power generation customers, where prices are negotiated on a business-to-business basis.
PGN's pricing power in NG distribution is supported by the significant price discount of domestic NG over most alternative fuels and its 90% market share in distribution in Indonesia. PGN's renegotiated procurement costs are broadly in-line with the current NG pricing in Indonesia, albeit being substantially lower than liquefied natural gas (LNG) prices in the Asia-Pacific region. Fitch does not expect another such large price revision in the medium-term.
Fitch also expects PGN's already robust credit metrics to continue to improve, driven by healthy annual free cash flow generation (post capex and dividends) of USD200m to USD300m in the next few years. The company had a net cash position of USD367m at 31 March 2012 and about 56% of its total debt of USD1,092m as at 31st December 2011 was due post 2017, with well laddered maturities till 2016. PGN's net debt/EBITDA leverage and FFO interest coverage has continued to improve in Q112 to -0.3x (FY11: -0.07x) and 52x (FY11: 35.85x) respectively.
PGN is exposed to an evolving regulatory environment. The aforementioned price revisions on some of its existing long term gas supply contracts have been supported by Indonesia's upstream oil and gas regulator, BPMigas. PGN could also be required to incur a one-off tax if it is required to separate its distribution operations into a separate subsidiary to comply with regulations issued in 2009. However, Fitch's sensitivity analysis indicates that PGN has substantial headroom in relation to its profitability and internal cash generation before any material adverse regulatory developments weakens its stand-alone credit metrics to a level commensurate with its constrained 'BBB-' IDRs.(ends)