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May 14 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has assigned Indonesia-based PT Perusahaan Gas Negara’s (PGN) senior unsecured USD1.35bn bonds a final rating of ‘BBB-'.
The assignment of the final rating is in line with the expected rating assigned on 2 May 2014 and follows a review of final documentation materially conforming to the draft documentation previously reviewed.
The notes are rated at the same level as PGN’s Issuer Default Rating of ‘BBB-’ because they will constitute direct, unconditional and senior unsecured obligations of the company.
The proceeds from the bond issue will be used for PGN’s capex and general corporate purposes. PGN expects to increase its investments in upstream oil and gas assets over the medium term in order to secure its supply of natural gas. PGN’s ratings are a notch below its standalone credit profile of ‘BBB’ because they are constrained by the rating on its 57% majority shareholder, the Republic of Indonesia (BBB-/Stable). PGN’s ratings reflect its dominant market position in natural gas distribution in Indonesia, strong pricing power and adequate financial flexibility to accommodate expected investments in upstream oil and gas assets. Its standalone rating is constrained by the regulatory uncertainties prevalent in Indonesia.
Strong Pricing Power: PGN’s credit profile benefits from its strong cost pass-through ability, allowing the company to maintain robust cash profit margins per unit of gas sold. Natural gas’s lower cost and PGN’s market share of about 80% in Indonesian natural gas distribution will allow the company to continue passing through increases in its procurement costs. The next most viable alternative, high-speed diesel, remains about 3x to 4x more expensive than natural gas in Indonesia. About 98% of PGN’s revenues derive from commercial and industrial users, whose prices are set on commercial terms.
We expect the profitability per unit of gas sold to fall slightly in the next few years from about USD3.9 in 2013. The decline would be driven by lower profits because of an increasing share of more expensive liquefied natural gas (LNG) in PGN’s supply mix and weaker margins in its business units in East Java, where the availability of gas outstrips demand.
Cost Increases: PGN’s procurement costs increased by more than 35% in 2013 and we expect a similar increase in 2014 because the procurement costs of some of its legacy contracts will be adjusted to better reflect market prices. Further increases are expected in 2015, reflecting a higher share of more expensive LNG in its supply mix. However, Fitch expects more stability in its procurement costs after 2015.
Upstream Investments: The company has spent about USD1bn to date, including USD250m in 2013, to increase its upstream asset base. The ratings also factor in its sizable budget for moving these assets into production. Risks attached to oil and gas exploration are higher than those of PGN’s gas transmission and distribution businesses. However, Fitch believes PGN will contain additional risks via involving or retaining experienced operators in its upstream ventures and by acquiring assets that are already producing or near to production. Given Fitch’s expectation of PGN generating over USD1bn of EBITDA per year, the company can accommodate large upstream M&A before its ratings are threatened.
Regulatory Risks: The standalone rating remains constrained by regulatory uncertainties and emerging market risks in Indonesia. Since 2011, PGN has faced gas price revisions on its long-term contracts that 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.
Financial Flexibility: Fitch expects PGN to maintain its funds from operations (FFO) net leverage (incorporating potential investments in upstream oil and gas assets) below 1.0x in the medium term. The company had unrestricted cash and equivalents of USD1.3bn at end-2013 and generated strong cash flows from operations of USD830m in 2013 (free cash flows of between USD100m and USD680m from 2011 to 2013).
The company has, however, raised additional external funding via its USD bond issue and plans to take on new term loans to support its capex and investment spend in 2014. While this would shift PGN into a net debt position from a net cash position at end-2013, this and the resultant impact on credit metrics are incorporated in its current ratings.
Negative: Future developments that may collectively or individually lead to negative rating actions include
-Negative rating action on the sovereign, due to the latter’s constraint on PGN’s ratings
Positive: Future developments that may collectively or individually lead to positive rating actions include
-Positive rating action on the sovereign PGN’s ‘BBB’ standalone profile could be negatively affected due to
- Major negative regulatory developments
- Material investments in upstream assets that weaken PGN’s overall business risk profile
- Financial leverage as measured by total adjusted debt to FFO increasing to over 4.0x on a sustained basis (2013: 1.2x)