S&P: PT Perusahaan Gas Negara 'BBB-' Ratings Placed On CreditWatch Negative; SACP Revised Down To 'bb'

(SINGAPORE (S&P Global Ratings) June 2, 2020)--S&P Global Ratings today took the rating actions listed above.

We believe PGN's cash flows will come under pressure and become less predictable due to negative political intervention and weak operating conditions. We revised down our assessment of PGN's SACP to 'bb' because the government has capped the company's gas selling price while its sourcing price is still being negotiated. PGN has no existing mechanism to reduce its sourcing price or receive assured compensation for the revenue loss. In our view, PGN's cash flows will become less predictable due to uncertainty over the timing and outcome of the negotiations. These headwinds are reflected in the company's recent letter to shareholders and analysts indicating that cash flow pressures are restricting its ability to support existing subsidiaries or affiliates. This is despite the cross-default clause that remains between PGN's U.S. dollar bonds and debt at its material subsidiaries, including wholly owned subsidiary PT Saka Energi Indonesia.

The Indonesian government issued a decree in April 2020 to cap industrial gas prices at US$6 per million British thermal units (mmbtu) for seven industrial sectors. PGN has negotiated a lower sourcing price with Pertamina on 97 billion British thermal units per day, representing 11% of its total requirement. PGN may face additional cash flow pressure if state-owned power utility, Perusahaan Perseroan (Persero) PT Perusahaan Listrik Negara, a major gas customer, is successful in invoking the force majeure clause on its gas contracts with the company.

That said, PGN's negotiations with its gas suppliers and discussions with the government are still ongoing. We continue to believe that the regulator will maintain its oversight of PGN's gas sourcing prices and will actively participate in gas price negotiations between gas producers and PGN as the offtaker. Our base case assumes PGN will earn average gross spreads of about US$1.80 per unit in 2020, which we expect to decline to US$1.50 per unit from 2021.

We estimate PGN's adjusted ratio of funds from operations (FFO) to debt will be 22% in 2020 and 18% in 2021, and its adjusted EBITDA margins will be about 24% in 2020, trending down to about 21% thereafter. If PGN's average gross spreads drop to US$1.00 per unit, we expect the adjusted FFO-to-debt ratio to decline to 11%-13% and the adjusted EBITDA margins to be 19%-20% over the next two years.

Pertamina's lack of a clear support mechanism for PGN and uncertainty over PGN's strategic importance to the group will weigh on the rating. The ratings on PGN benefit from our current view of the company's strategically important status to the Pertamina group, which results in a two-notch uplift from the SACP. We believe PGN plays an important role as the dominant gas transmission and distribution network provider in Indonesia, as evident from the government's move to consolidate state-owned enterprises in the oil and gas sector in 2018. There is a strong link between PGN and the government as the government has some ability to influence the company's strategy, growth, and management through its "golden share" (which provides it with special veto rights). This is notwithstanding the government's transfer of its majority shareholdings in PGN to Pertamina.

However, Pertamina has yet to clearly articulate defined strategic goals and demonstrate its support for PGN. We also believe Pertamina's integration of the energy group remains far from complete, given the lack of integration between PGN's upstream subsidiary, Saka, and Pertamina's exploration and production business. At the same time, the sale of the remaining 49% stake in PT Pertamina Gas (Pertagas) by Pertamina to PGN remains unclear. As a result, uncertainty over PGN's long-term leverage tolerance persists, following its acquisition of 51% of Pertagas in 2018 and the potential divestment of Saka.

Meanwhile, Pertamina has cut its revenue guidance for 2020 by 30% year on year, citing the slump in crude oil prices, falling oil demand, and a weakening Indonesian rupiah against the U.S. dollar. We estimate PGN's EBITDA contribution to Pertamina will be only about 15% over the next two to three years. In our view, the communication and coordination among the Pertamina group companies, including PGN and Saka, are not seamless. The lack of a well-defined mechanism to support the group's subsidiaries could result in a lack, or delay, in support.

The CreditWatch placement with negative implications reflects at least a one-in-two chance that we could take a negative rating action on PGN in the next 60-90 days, if we believe the likelihood of extraordinary group support from Pertamina has reduced.

In addition, we may lower the ratings on PGN if we lower the sovereign credit rating on Indonesia.

We plan to resolve the CreditWatch placement after reassessing PGN's strategic importance and link to Pertamina. Specifically, we will review PGN's long-term normalized business mix, leverage and capital structure, and any support mechanism provided by Pertamina, if required. We could remove the ratings from CreditWatch if we establish that PGN will remain strategically important to Pertamina. (ends)