Moody's upgrades Perusahaan Gas Negara to Baa3; outlook stable
Tuesday, October 29 2013 - 10:07 AM WIB
According to Moody's practice with investment-grade ratings, the corporate family rating of PGN has been withdrawn and simultaneously replaced with an issuer rating.
The rating outlook is revised to stable from positive.
PGN's Baa3 rating reflects the application of Moody's rating methodology for government-related issuers (GRIs), updated in July 2010, and which combines (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 rating upgrade 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 solid financial profile that is constrained by 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 capex 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 solid financial profile as well as its management strategy and investment criteria somewhat mitigate the execution risks," continues Tay.
Its BCA also incorporates 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 rating 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) PGN's upstream acquisitions will be measured and sustainable.
The rating could be upgraded if PGN's underlying credit quality remains strong and Indonesia's sovereign rating is upgraded.
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 BCA could come under pressure if its consolidated credit metrics weaken, such that debt/ capitalization increases beyond 45%-50% or retained cash flow (RCF) over debt falls below 20% to 25% on a sustained basis.
Furthermore, a change in the government's supportive policy towards the gas industry could prompt a review of its rating.
The principal methodologies used in rating PGN were Regulated Electric and Gas Utilities, published in August 2009, and Government-Related Issuers: Methodology Update, published in July 2010. Please see the Credit Policy page on www.moodys.com for a copy 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 83% in 2012.
In the 12-month period ended 30 June 2013, PGN generated total revenue of $2.9 billion. Of this total, more than 90% came from the gas distribution business, while the remainder came mostly from its transmission business. PGN is publicly listed, with a market capitalization of $10.9 billion as of 22 October 2013. The Indonesian government, through the Ministry of State-Owned Enterprises, owns 57% of the company. (ends)