Release: S&P revises PGN outlook to positive
Tuesday, December 19 2006 - 03:51 PM WIB
The outlook revision reflects the expectation that the financial profile of PGN will improve in the near- to medium-term, with distribution and transmission sales revenue increasing as a result of its two new major transmission lines into West Java from South Sumatra (SSWJ1 and SSWJ2). The transmission pipeline SSWJ1 is over 90% complete, while SSWJ2 is expected to be operational by 2007. Consequently, the company's financial profile is also expected to improve with better interest coverage and cash flow credit protection measures. In this regard, the ratings could be raised if the company's key financial metrics improve, in particular its funds from operations (FFO) to debt exceeds 35% and its debt-to-EBITDA ratio falls below 2.2x.
Such improvements would be underpinned by PGN maintaining its dominant position amid industry liberalization, and the company's aggressive capital expenditure program being achieved on time and on budget. It also assumes that the network tariff determination does not hinder the company's cash flow generating abilities.
On the other hand, there could be downward pressures on the outlook or rating if there is a significant decline in gas exploration and production activities, which further lower gas supply reliability, reduction in governmental support, decrease in pipeline utilization rates, or if an overly aggressive capital expenditures resulted in a material weakening of financial measures. Triggers for such financial measures would be FFO to debt falling below 25% and debt-to-EBITDA ratio rising above 3x.
The affirmation of the ratings on PGN continues to reflect its challenges such as gas supply constraints and the mismatch of tenors of PGN's gas sales contracts with its gas purchase agreements, aggressive capital expenditure program, high concentration on industrial customers, and material country risks and regulatory uncertainties. These challenges are however, offset by the company's dominant position in the gas transmission and distribution business, moderate and improving cash flow measures, and insulation from price risk and minimal volume risk from transmission business. The ratings also acknowledge some inherent support from the government through supportive regulations, although they do not factor in any such potential direct support. Standard & Poor's will reevaluate the credit rating on PGN if the government were to lower its shareholding in the company to below 50%.
PGN is an Indonesian government-owned gas utility involved in the transmission, distribution, wholesaling, and retailing of gas. For the first six months of 2006, PGN generated total revenue of Indonesian rupiah (IDR) 3.4 trillion (US$375 million) and EBITDA of IDR1.7 trillion (US$185 million). The company had total assets of IDR14 trillion as at June 30, 2006.
The government's plan to increase gas usage for power production to 39% in 2010, from 31% currently, will increase demand for gas, which could translate into financial support for PGN to expand its pipeline network. Greater certainty in the domestic gas supply should encourage higher investments in gas-fired power plants, which should in turn reduce fuel oil consumption and boost demand for gas.(end of release)