Moody's affirms PGN's Baa3 issuer rating; assigns (P)Baa3 to proposed senior unsecured bonds
Saturday, May 3 2014 - 01:30 AM WIB
Moody's has also assigned a provisional rating of (P)Baa3 to its proposed senior unsecured bonds.
The ratings outlook is stable.
PGN's Baa3 rating reflects the application of Moody's rating methodology for government-related issuers (GRIs), updated in July 2010, and which incorporates (1) the company's standalone credit quality, or baseline credit assessment (BCA) of baa3; and (2) Moody's assessment of the credit support that the government of Indonesia (Baa3 stable) is likely to provide in a situation of stress.
"The senior unsecured rating of (P)Baa3 is mainly driven by PGN's good pricing power with a track record of cost pass through, favorable industry dynamics that offer strong growth potential, and a strong financial profile that is constrained by sizeable capital expenditure and upstream business expansion," says Ray Tay, a Moody's Associate Vice President and Analyst.
"Although PGN is ambitious in seeking to expand its upstream business, thereby increasing its capital expenditure and execution risk, we recognize the long-term benefits of this strategy as it will help diversify its business and supply sources," adds Tay.
"PGN's strong financial profile as well as its management strategy and investment criteria somewhat mitigate the execution risk."
Its BCA also considers the potential volatility in distribution cash flows owing to the mismatch between its sales contracts and supply contracts.
Under Moody's rating methodology for GRIs, government support for the company is assessed as "strong" given its strategic role in Indonesia's gas sector.
Moody's assesses the dependence level as "high" as the credit profiles of PGN and the Indonesian government are closely linked, given PGN's domestic focus.
The ratings outlook is stable, reflecting PGN's sustained and strong financial profile, and Moody's expectation that (1) the company can continue to pass through any cost increases of upstream gas to its end-users; (2) it will maintain its dominant position in Indonesia's gas transmission and distribution sector; and (3) its upstream acquisitions will be measured and sustainable.
The ratings could be upgraded if Indonesia's sovereign rating is upgraded and if PGN's underlying credit quality remains consistent with its current BCA of baa3. Absent an upgrade to the sovereign rating, an upgrade to PGN's ratings is very unlikely because the company's revenues and most of its funding are from domestic sources.
A downgrade is possible if PGN's underlying credit quality deteriorates because of (1) an unfavorable regulatory environment that hurts its financial position; (2) an erosion of its dominant market share under a deregulated environment, with increased pressure on its profit margins owing to rising competition; and/or (3) changes in the management's strategy regarding its upstream business, and which deviates from Moody's expectations.
Its ratings could come under pressure if its consolidated credit metrics weaken, such that debt/capitalization increases beyond 60%-65% or retained cash flow/debt falls below 9% to 13% on a sustained basis.
Furthermore, a downgrade of the sovereign rating or a change in the government's shareholding level and supportive policy towards the gas industry could prompt a review of its ratings.
The principal methodologies used in rating PGN were Regulated Electric and Gas Utilities, published in December 2013, and Government-Related Issuers: Methodology Update, published in July 2010. Please see the Credit Policy page on www.moodys.com for copies of these methodologies.
Established in 1965, Perusahaan Gas Negara (PGN) is primarily engaged in the transmission and distribution of natural gas. Its transmission business mainly operates under its 60%-owned subsidiary, PT Transportasi Gas Indonesia, while its distribution business has a strong market share of 79% as of 31 December 2013.
In the financial year ended 31 December 2013, PGN generated total revenue of $3.0 billion. Of this total, around 92% came from its gas distribution business, while the remainder mostly came from its transmission business. PGN is publicly listed, with a market capitalization of $11.5 billion as of 28 April 2014. The Indonesian government, through the Ministry of State-Owned Enterprises, owns 57% of the company. (ends)