Fitch upgrades PGN's IDRs to 'BB+'; Outlook stable
Monday, July 12 2010 - 07:58 PM WIB
The upgrade reflects PGN's improved financial and operating profiles and Fitch's expectation that the company's net leverage as reflected by net debt/EBITDAR will remain below 1.0x in the short to medium term. This is underpinned by several factors: the completion of the South Sumatra-West Java pipeline since August 2008; the expected completion of the West Java distribution projects in 2011 (delayed from 2009); and robust gas demand, which will enhance the company's distribution volume and operating cash flow.
PGN's ratings also reflect its dominant position in Indonesia's gas distribution and transmission sectors. PGN's liquidity is sound with strong cash reserves of around IDR8.2tn as at end-March 2010 compared with total debt of IDR11.2tn, of which more than 60% are long-dated maturity loans from developmental banks. PGN continues to enjoy an extended maturity profile for its borrowing with less than 30% of its loans maturing in 2010 and 2011.
Nonetheless, PGN's credit profile continues to be constrained by its exposure to gas supply and price risks, concentration of sales to PT Perusahaan Listrik Negara (PLN), and a mismatch between long-term gas purchase contracts and shorter-term gas sale contracts. PGN experienced gas supply disruption from ConocoPhillips (Grissik) Ltd, subsidiary of ConocoPhillips ('A'/Stable) in early 2010 -- resulting in a lower gas distribution volume to end-users. However, Fitch expects distribution volume to stabilize at around 850 million standard cubic feet per day (mmscfd) in 2010 as a result of new gas supplies from PT Pertamina (Persero) and PT Medco E&P Indonesia, and improving gas supply from ConocoPhillips (Grissik) Ltd since May 2010.
The agency also notes that PGN has budgeted capital expenditure of USD200-250m in 2010 which includes the construction of a LNG receiving terminal in West Java. Fitch expects PGN to fund this expansion internally in view of its strong cash flow generation.
The Stable Outlook reflects the agency's expectation that PGN's credit metrics will remain robust driven by its dominant market position in the gas distribution and transmission businesses as well as robust gas demand. Given the government's majority ownership and close links to PGN, a downgrade of the Republic of Indonesia's sovereign rating ('BB+'/Stable) would lead to a downgrade in PGN's ratings. Additionally, sustained operating EBITDAR margins below 45% and/or debt funded expansion resulting in sustained adjusted net debt/operating EBITDAR above 1.0x may also result in a negative rating action. Conversely, if the sovereign is upgraded, PGN's ratings may to be upgraded following the successful completion of the LNG receiving terminal, provided that operating EBITDAR margins of around 50% and adjusted net debt/operating EBITDAR of less than 1.0x are sustained.
PGN is a leading gas transmission and distribution company. The company is 56.97% owned by the Government of Indonesia. In the quarter ending March 2010, revenue was IDR18tn, operating EBITDAR was IDR6.6tn and annualised net debt/operating EBITDAR was 0.4x.(end of release)