RELEASE: Moody's assigns B3 to PGN US$200 mln 10-year notes
Tuesday, July 29 2003 - 04:14 AM WIB
The rating is on review for possible upgrade, which is line with Indonesia's sovereign rating.
At the same time, Moody's has assigned B1 senior implied and B2 local currency issuer rating to PGN. The ratings are also on review for possible upgrade.
The B1/B2 ratings reflect PGN's linkage to the Government of Indonesia (GOI), which is currently rated at B3.
In Moody's opinion, on a standalone basis, PGN's solid operating and financial profiles support a higher rating. Moody's notes that 100% of PGN's current debts outstanding are soft loans borrowed by the GOI from international credit agencies for on-lending to PGN, but these loans are not subject to cross default on GOI's other debt obligations, therefore allowing PGN to be rated higher than the GOI.
However, the GOI's 100% ownership in PGN has in some ways capped the ratings of PGN at B1/B2. If the local currency rating of the GOI is upgraded, Moody's expects to upgrade PGN's senior implied and issuer rating to Ba3 and B1 respectively.
Moody's says that the B1 senior implied rating also reflects PGN's exposure to the uncertain political, economic and social environments in Indonesia.
The rating further recognizes the evolving and uncertain regulatory environments for the gas industry under the New Oil & Gas Law that came into force in November 2001. Moody's notes that BPH Migas, the new regulatory body for downstream gas business, was only established in May 2003.
It remains unclear at this stage as to the future regulations on transmission and distribution tariffs, and the compensation rates on unutilized capacities for existing operators under the "Open Access" policy.
Despite the lack of clarity regarding future regulations, Moody's expects that the government will maintain a stable operating environment and industry structure given the relative importance of natural gas as a source of fuel, and the regulator's intention to attract more private sector investment. Moody's understands that under the New Oil & Gas Law, all existing gas supply and sales contracts will not be affected.
The rating also considers the potential volatility in PGN's gas distribution cash flow arising from the mismatch of tenor of the short-term sales contracts against long-term take-or-pay supply contracts.
PGN is exposed to the risk of non-renewal of sales contracts upon maturity as 98% of its distribution customers are large industrial users who have the ability to switch fuel source from gas to oil if the latter found to be attractive. Such risk is partially mitigated by the continuing growth in demand for gas in Indonesia, the government's intention to further reduce oil subsidy, and PGN's diversified and relatively stable customer base of over 650 large industrial users.
Currently 95% of the gas supply is covered by the contracted sales for the next two years, which provides certainty of revenue and cash flow in the near term. Moody's also notes that PGN has large capital expenditure over the next few years mainly to fund the South Sumatra - West Java transmission pipelines project which has been approved by the government, and the planned Duri - Medan transmission project.
Total costs of approximately US$ 1 billion will mainly be funded by debts, including US$450 million soft loans granted by JBIC, the proposed US$200 million guaranteed notes, and operating cash flow.
Moody's also understands that PGN will tender for other transmission projects under the government's Master Plan, which will further increase its capital expenditure requirement. The projected growth in debt and the relatively high dividend payout ratio will weaken PGN's financial profile, resulting in negative free cash flow position until all projects are completed.
Moody's draws comfort from the company's financial policy to maintain Debt/Cap not exceeding 70%, the pre-funded nature of most of these projects through long term debts and PGN's projected growth in operating cash flow, which is sufficient to cover its scheduled debt service requirement over the next few years.
On a positive note, the rating reflects PGN's dominant position in Indonesia's gas transmission and distribution sectors. The long term transmission contracts continue to generate relatively stable cash flow, principally through its 60%-owned subsidiary PT Transportasi Gas Indonesia (TGI).
Moody's also expects that PGN will maintain its competitive position in the transmission and distribution of natural gas in the domestic market, given its established network coverage and customer base, good track record, and experienced management. In addition, the fuel diversification policy of the government to promote the use of natural gas, which is more environmentally friendly with abundant reserves relative to oil, will support the growth of the gas industry in Indonesia and benefit the incumbent operator such as PGN.
Moody's notes that Ministry of State-Owned Enterprises intends to privatize PGN through an IPO but will maintain minimum 51% ownership in PGN in the medium term. It remains uncertain as to the timing of privatization and the potential benefits to PGN in terms of new equity raised.
Moody's considers that the proposed privatization is unlikely to have any material impact on the rating. The B2 local currency issuer rating reflects PGN's structural subordination to its 60%-owned subsidiary TGI, which will contribute approximately 50% of the group's projected operating profits in the next 3 years. Moody's considers that PGN has no full control on TGI's cash flow and is only entitled to the cash dividend received only.
Although the dividend policy of TGI remains unclear at this stage, Moody's expects TGI will distribute most of its available cash as dividend, after the necessary capital expenditure and strategic cash balance for back-up requirement.
Moody's further comments that PGN has no external back-up liquidity arrangement and is exposed to any short term market volatility and interruption. Moody's draws comfort from PGN's low refinancing pressure in the next few years which will be covered by its projected operating cash flow.
PGN is also exposed to adverse currency movement given all of its debts are denominated in foreign currency. The risk is partially mitigated by approximately 80% of PGN's revenue are linked to US$.
PT Perusahaan Gas Negara, headquartered in Jakarta, Indonesia and 100% owned by the Government of Indonesia, is engaged in the transmission and distribution of natural gas in the country, with leading domestic market shares.(End of release)