August 5, 2013 / 7:59 AM / 4 years ago

RPT-Fitch affirms Indonesia's PGN at 'BBB-'/'AAA(idn)'

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Aug 5 (Reuters) - (The following statement was released by the rating agency

Fitch Ratings has affirmed Indonesia-based PT Perusahaan Gas Negara's (PGN) Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'BBB-' and its National Long-Term rating at 'AAA(idn)'. The Outlook is Stable.

PGN's ratings are constrained by the rating of its 57% majority shareholder, the Republic of Indonesia (BBB-/Stable). PGN's standalone credit profile is significantly stronger than its constrained 'BBB-' rating. Its strong credit profile reflects PGN's dominant market position in natural gas (NG) distribution, strong pricing power and a solid financial profile. PGN has substantial headroom at its current constrained rating to accommodate expected investments in upstream oil and gas assets.

KEY RATING DRIVERS

Strong pricing power: PGN has been able to pass through its recent NG cost increases, allowing it to maintain a gross cash profit of over USD4 per million British thermal units (mmbtu). Fitch expects PGN to be able to broadly maintain its profit per unit owing to its near 90% share of Indonesia's gas distribution infrastructure and substantial cost advantages of NG relative to alternative fuels. About 98% of PGN's client base is commercial and industrial users, whose prices are set on commercial terms.

Cost increases: Some of PGN's suppliers have renegotiated prices upwards on legacy gas supply contracts following the intervention of Indonesia's upstream oil and gas regulator. About 60% of PGN's NG requirements have been re-priced at USD5.9/mmbtu at April 2013, from USD1.9/mmbtu in September 2012. Fitch expects any further cost increases in the medium term to be passed through and are unlikely to be material, as the revisions since September 2012 are a substantial step-up over its legacy purchase prices, bringing them closer to market prices in Indonesia.

Upstream investments raise operating risk: PGN has invested about USD365m in upstream assets to date, and could potentially incur about USD1.2bn in 2013. This is part of PGN's long term strategy to increase its vertical integration; further M&A post-2013 is likely. Risks attached to oil & gas exploration are higher than those of PGN's gas transmission and distribution businesses.

However, Fitch believes PGN will contain additional risks via involving/retaining experienced operators in its upstream ventures. Given Fitch's expectation of PGN generating over USD1bn of EBITDA per year, the company can accommodate large upstream M&A before its 'BBB-' rating is threatened.

Financial flexibility: Fitch expects PGN to maintain its funds from operations (FFO) net leverage below 0.75x in 2013 (-0.69x in 2012), after incorporating potential investments in upstream oil and gas assets as well as the expected capex of USD500m in 2013. Its ability to take on these investments is supported by its healthy and stable operational cash flows and a solid liquidity profile.

PGN had a net cash position of USD808m at 31 March 2013, and about 60% of its total debt of USD858m was due after 2017, with well-laddered maturities until 2017.

Regulatory risks: PGN is exposed to regulatory uncertainties in Indonesia. Apart from price revisions on its long-term supply contracts which were supported by the regulator, PGN could also incur a one-off tax if it is required to hive off its distribution operations into a separate subsidiary - to comply with regulations issued in 2009. However, PGN has substantial headroom in relation to its profitability and internal cash generation.

RATING SENSITIVITIES

Negative: Future developments that may collectively or individually lead to negative rating actions include

-Negative rating action on the sovereign ratings, due to the latter's constraint on PGN's ratings

-Major changes in the Indonesian regulatory environment and/or a material weakening of PGN's operating or financial risk profile. However, given the strength of PGN's standalone credit profile over its constrained 'BBB-' IDR, Fitch does not foresee developments that can negatively affect PGN's current IDRs or National Ratings in the medium-term.

Positive: Future developments that may collectively or individually lead to positive rating actions include

-Positive rating action on the sovereign ratings

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