Standard & Poor's: PT Perusahaan Gas Negara Tbk.'s proposed U.S. dollar notes assigned 'BB+'
Saturday, May 3 2014 - 01:38 AM WIB
The rating on the proposed notes is subject to our review of the final issuance documentation. PGN plans to use the proceeds from the proposed notes to refinance existing obligations, capital expenditure, working capital requirements, and other general corporate purposes. The rating on PGN reflects the company's dominant position in gas distribution and transmission in Indonesia, stable cash flows supported by sales that we expect to be robust, and insulation from price risks. The company's exposure to Indonesia's country, macroeconomic and regulatory risks, reducing natural gas reserves, and counterparty risks temper these strengths.
We expect PGN's cash flows to remain stable even if the company incurs debt to fund its capital expenditures and investments. The company earns a stable cash margin on gas sales in its distribution business. Hence, any increase in gas supply to PGN's network is likely to contribute to cash flows immediately as demand remains strong. An increase in gas prices in Indonesia is unlikely to affect PGN's margins because the company has a track record of being able to pass the higher costs on to consumers while maintaining a sustainable margin of about US$3.5-US$4 per unit volume of gas.
The stable rating outlook on PGN reflects the outlook on the sovereign credit rating on Indonesia (BB+/Stable/B; axBBB+/axA-2), the likelihood of continued government support for the company, and our expectation that PGN's "minimal" financial risk profile will remain stable in the next 12-18 months. We also anticipate that the company's "satisfactory" business risk profile will not weaken as the company looks to secure gas supplies in Indonesia.
We could raise the rating on PGN if we upgrade Indonesia; PGN's stand-alone credit profile (SACP) remains at 'bbb-' or higher while the company undertakes new projects or invests in upstream gas assets; and our assessment of government support does not weaken.
We could lower the rating if we downgrade Indonesia, or PGN's SACP weakens by five notches or more from the current 'a-' assessment, assuming the rating on the government remains at 'BB+', and our assessment of government support does not change. We may also lower the rating if: (1) a significant decline in gas exploration and production in Indonesia diminishes the reliability of gas supplies or lowers pipeline utilization rates and weakens PGN's SACP; (2) significant delays or cost overruns in PGN's capital expenditure plan materially weaken the company's financial measures; and (3) PGN's interest coverage weakens beyond our expectation due to higher debt incurrence and weaker cash flows. A ratio of funds from operations to debt of about 50% would characterize such a scenario. (ends)