TEXT-S&P summary: Tokyo Gas Co. Ltd.
(The following statement was released by the rating agency)
Dec 07 -
Summary analysis -- Tokyo Gas Co. Ltd. ---------------------------- 07-Dec-2012
CREDIT RATING: AA-/Negative/A-1+ Country: Japan
Primary SIC: Gas production
Mult. CUSIP6: 889115
Credit Rating History:
Local currency Foreign currency
28-Sep-2012 AA-/A-1+ AA-/A-1+
28-Jan-2011 AA-/-- AA-/--
Rating Rating Date
JPY30 bil 4.00% bnds ser 16 due 05/31/2016 AA- 28-Jan-2011
JPY30 bil 2.625% bnds ser 17 due 06/11/2018 AA- 28-Jan-2011
JPY20 bil 1.01% bnds ser 23 due 06/09/2023 AA- 28-Jan-2011
JPY30 bil 1.41% bnds ser 24 due 12/02/2013 AA- 28-Jan-2011
JPY20 bil 1.59% bnds ser 25 due 05/27/2014 AA- 28-Jan-2011
JPY10 bil 2.29% bnds ser 26 due 05/27/2024 AA- 28-Jan-2011
JPY10 bil 2.14% bnds ser 27 due 03/03/2025 AA- 28-Jan-2011
JPY20 bil 2.29% bnds ser 28 due 06/15/2027 AA- 28-Jan-2011
JPY10 bil 1.40% bnds ser 29 due 12/07/2015 AA- 28-Jan-2011
JPY20 bil 1.658% bnds ser 30 due 05/29/2015 AA- 28-Jan-2011
JPY30 bil 1.405% bnds ser 31 due 12/18/2019 AA- 28-Jan-2011
JPY20 bil 2.135% bnds ser 32 due 09/24/2040 AA- 28-Jan-2011
JPY20 bil 1.203% bnds ser 33 due 09/24/2020 AA- 28-Jan-2011
The ratings on Japan-based regulated natural gas producer and distributor Tokyo Gas Co. Ltd. (AA-/Negative/A-1+) reflect Standard & Poor's Ratings Services' assessment that the stand-alone credit profile (SACP) on the company is 'aa-' and that the ratings incorporate no upward adjustment to reflect extraordinary government support. We have incorporated the supportive ongoing regulatory framework in Japan into our analysis of the SACP for the company.
Tokyo Gas' "excellent" business risk profile reflects our view that the company's stable earnings benefit from a favorable government regulatory framework. The company has a vertically integrated business model and a monopolistic position in the Tokyo metropolitan area, and it benefits from the government's cost-plus system and fully passed-on fuel cost adjustment mechanism, which are almost identical to those for domestic electricity companies. Tokyo Gas' "modest" financial risk profile reflects our expectation that measures of the company's financial performance will remain predictable over the next two to three years, based on its solid business risk profile as a regulated gas utility. The company also has a strong business franchise and customer base, and we expect gas sales in the Tokyo metropolitan area to increase gradually in the long term. Furthermore, we anticipate no material change in the competitive environment in the immediate future. The company also has a relatively sound financial profile compared with Japanese electric utility companies, has stable funding, and has a conservative financial policy.
The ratings on Tokyo Gas reflect our view that there is a "low" likelihood of the government of Japan (AA-/Negative/A-1+) providing the company with timely and sufficient extraordinary support in the event of financial distress. Based on our criteria for government-related entities (GREs), a low likelihood of support does not justify any elevation of the ratings to a level higher than the company's SACP.
Even though we expect gas demand in the industrial sector to remain sluggish in the short term due to the weak domestic macro economy, we expect improvement in Tokyo Gas' financial performance to continue due to lower prices of liquefied natural gas (LNG) and an increase in its power generation businesses. Domestic electric utility companies have faced supply shortages in the wake of the nuclear crisis at the Fukushima No.1 power plant, in northeast Japan. Tokyo Gas has increased its gas-fired power generation business to cover the lost nuclear power generation. In addition, gas utilities have slightly different business structures than their electricity counterparts, and we foresee little progress in government debate on a review of regulations controlling this industry over the next one to two years. In addition, we think that Tokyo Gas will maintain a conservative financial policy and discipline for capital expenditures and investment. Accordingly, we expect its financial metrics to remain stable over the next two to three years.
We expect Tokyo Gas' profitability and key financial metrics to improve in fiscal 2012 (ending March 31, 2012). We expect the ratio of Tokyo Gas' funds from operations (FFO) to total debt to improve to just below 30%, from 23% in the previous fiscal year, and total debt to capital to remain around just above 45%.
Under the stressed scenario of a Japanese government default, we think that the company may be affected by the worsening credit quality of the sovereign.First, more than 90% of Tokyo Gas' sales and profits are from the domestic market. As such, we think that the government may intervene with a pricing formula that allows the company to pass on increasing fuel costs to its end users because of its status as a public utility and its regional monopoly in the Tokyo metropolitan area. In addition, as Tokyo Gas imports most of its LNG, its exposure to foreign exchange fluctuations remains high. The company also depends on domestic financial markets to issue or refinance bonds or bank loans. Moreover, its key financial metrics are not so strong compared with other industrial companies rated in the 'AA' category. Accordingly, it is Standard & Poor's view that the ratings on the company cannot be completely insulated from the constraints of Japan's sovereign credit quality.
Tokyo Gas has adequate sources of liquidity, in our view, and these more than cover its needs for the foreseeable future, even if its EBITDA declines sharply. We base our liquidity assessment on the following factors and assumptions:
-- Debt maturities for the next 12 months are within cash and cash equivalents.
-- EBITDA is highly predictable, supported by a favorable regulatory framework.
-- Even if net sources decline by 20%, we believe net sources would remain above cash requirements.
-- The company has strong relationships with its main banks, in our assessment, and has a good standing in the bond markets.
Tokyo Gas' proactive financial management and its good access to the domestic market should mitigate its refinancing risks, in our view. The bond market in Japan weathered the global financial crisis and ensuing downturn, allowing highly rated issuers such as Tokyo Gas to enjoy favorable terms and conditions. Its coupon rates were just above 1% for 10-year bond placements and under 2% for 20-year placements in 2011. Assuming relative stability in Japanese capital markets, we see little risks in the company's refinancing activities at present.
The outlook is negative. We think that Tokyo Gas can maintain more stable earnings than its rated domestic peers even amid a challenging business environment. The negative outlook on the long-term sovereign ratings on Japan is likely to constrain the ratings on Tokyo Gas. We may consider lowering the ratings on the company if we lower the long-term sovereign ratings on Japan. The ratings may also come under pressure if we see a high likelihood of material deterioration in measures of the company's financial performance, such as FFO to total debt of near or below 20% for consecutive periods. Such a scenario may result from deterioration in the domestic economy or a shift in the company's financial policy from conservative to aggressive and a significant increase in capital expenditures. As long as the ratings and outlook on Japan remain unchanged, we see little likelihood of upward movement in the ratings, and we consider the possibility of an upgrade to be low in the next year or two.
Related Criteria And Research
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- Rating Government-Related Entities: Methodology And Assumptions, Dec. 9, 2010