Release: Fitch revises PGN's outlook to positive; affirms IDR at 'BB-'
Tuesday, March 25 2008 - 04:45 AM WIB
- Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BB-' (BB minus)
- PGN Euro Finance 2003 Limited's USD125 million notes due 2014 and USD150m notes due 2013, guaranteed by PGN and its subsidiaries, at 'BB-' (BB minus)
- National Long-term rating 'AA(idn)'
At the same time, Fitch has revised the Outlook for the IDRs and National Long-term ratings to Positive from Stable.
The Outlook revision reflects Fitch's expectation that completion of the South Sumatera - West Java (SSWJ) pipeline project is likely to result in higher gas distribution volumes, leading to improved revenue and leverage ratios. PGN expects to complete the final leg of the SSWJ project in October 2008. On completion of the project, total capacity of SSWJ pipeline will reach 970 million standard cubic feet per day (mmscfd), which will significantly boost PGN's existing gas distribution capacity.
PGN's ratings are supported by its dominant position in the gas distribution and transmission businesses in Indonesia, with a market share of about 93% and 85%, respectively, at end-1H07. In its gas distribution business, PGN buys gas on long-term contracts at a fixed dollar-denominated price and sells it to numerous industrial and commercial consumers, under take-or-pay gas sales agreements. Fitch believes that gas demand in Indonesia will remain strong, supported by a shift to gas by industrial companies due to its price advantage over crude oil. PGN's current gas selling price to industrial customers is 57% and 77% cheaper than the prices of domestic subsidised high speed diesel (HSD) and non-subsidised HSD, respectively. PGN's gas transmission business is managed by its 60%-owned subsidiary PT Transportasi Gas Indonesia (TGI), which owns and operates two transmission pipelines. TGI has strong counter-parties and it earns a predetermined transmission commission on the gas carried.
Although PGN has long-term gas sales and supply agreements with upstream operators that mitigate supply availability, Fitch notes that securing the gas supply to meet future increases in gas demand will be a key challenge for PGN. The rating is also constrained by PGN's aggressive capital expenditure, totalling about USD268m in 2008. About 60% of this total capital expenditure is earmarked to expand transmission networks while the reminder will be used to expand distribution networks. Despite this investment, Fitch expects leverage to decrease due to the additional gas sales following the completion of SSWJ pipelines project in October 2008. Therefore, the agency also expects net debt to EBITDA is likely to decline to about 2.0x to 2.2x in 2008.
The ratings may be upgraded if PGN maintains a net debt to EBITDA of less than 2.0x in 2008 and 2009. The completion of the SSWJ pipeline projects on schedule and without further significant cost overruns would also be positive for the rating. Conversely, a sustained level of net debt to EBITDA above 2.5x in 2008 and 2009 and material delays in the SSWJ project completion and/or significant project cost overruns may result in a downward revision on its Outlook.
At end-1H07, PGN had total revenue of IDR3,846 billion and EBITDA of IDR1,760bn. The Government of Indonesia (rated 'BB'/Stable) owns about 55.2% of the company as at 30 June 2007, while public shareholders as well as the company's employees and management hold a 44.2% and 0.6% stake, respectively. (end of release)