RELEASE: S&P assigns ratings to PGN

(SINGAPORE July 29, 2003)Standard & Poor's Ratings Services said today it has assigned its 'B-' foreign currency and 'B' local currency long-term ratings to PT Perusahaan Gas Negara (Persero) (PGN). The outlook is stable. PGN is an Indonesian government-owned gas utility involved in the transmission, distribution, and wholesale and retail of gas.

"The ratings are constrained by those on the Republic of Indonesia (local currency B/Stable/B; foreign currency B-/Stable/C), reflecting among other things PGN's 100% ownership by the government and enshrined government policy role. In addition, all of PGN's existing debt is onlent from the government and a substantial part of its business is regulated by a government institution," said Mark Legge, credit analyst at Standard & Poor's.

PGN's business faces risks from an uncertain regulatory environment related to its network transportation charges, which account for about 40% of gross profits. The regulatory framework has been undergoing changes with the establishment of BPH Migas as the new independent regulator. As these changes are still occurring, there is a lack of clarity in regulatory methodology, and the parameters and time period that the regulation will cover.

The company's gas sales customer base is concentrated and the extent of prospective gas demand is uncertain. PGN's customers are primarily industrial users, whose demand is closely related to overall economic activity in a nation where the economy remains fragile. Moreover, as most of its contracts to buy gas are take-or-pay agreements that are much longer than its gas sales contracts, the company faces the task of re-signing gas sales contracts with existing and prospective customers or risk paying for gas it cannot resell. The underlying risk that demand will not increase consistently or rapidly is greater at present for PGN as it expands its networks massively, a project that will increase debt four times over the next five years.

Supporting the ratings is PGN's strong market position in gas distribution and transmission, with both businesses being virtual monopolies. Its long-term gas transmission contracts eliminate gas price risk and minimize gas volume risk. The company's cash flow coverages are projected to be solid, with funds from operations projected to exceed 30% of debt in 2003 and 2004. Its financial profile is weakened, however, by PGN's exposure to interest rate and, to a lesser extent, exchange rate risk.(End of release)