(The following statement was released by the rating agency)
Sept 10 -
Summary analysis -- PT Perusahaan Gas Negara (Persero) Tbk. ------- 10-Sep-2012
CREDIT RATING: BB+/Stable/-- Country: Indonesia
Primary SIC: Gas production
Credit Rating History:
Local currency Foreign currency
13-Apr-2011 BB+/-- BB+/--
15-Mar-2010 BB/-- BB/--
21-Dec-2007 BB-/-- BB-/--
The corporate credit rating on Indonesian gas utility PT Perusahaan Gas Negara (Persero) Tbk. (PGN) reflects the company’s exposure to sovereign risks and susceptibility to regulatory risk. PGN’s strong market position in gas transmission and distribution, and its improving financial risk profile temper these weaknesses. The company’s transmission business is also insulated from price risk and has minimal volume risk. The rating on PGN is consistent with the foreign currency sovereign credit rating on Indonesia (BB+/Positive/B; axBBB+/axA-2).
Based on our criteria for rating government-related entities (GREs), we believe PGN has an “important” role in executing the administration’s Integrated Indonesian Gas Pipeline projects, and has a “strong” link with its 57% owner, the Indonesian government. In our opinion, severe sovereign stress could hurt PGN’s credit standing. Stress scenarios include a significant economic contraction, sharp currency depreciation, payment defaults by a large number of customers, rising inflation, and lower gas tariffs with the inability to pass through increases in operating costs. Our view is based on PGN’s exposure to country risks due to the company’s government linkages, sales to other state-owned enterprises, and regulatory risk.
We assess PGN’s stand-alone credit profile at ‘bb+'. Cash flows have improved marginally, due to higher average selling prices in the company’s distribution business in 2011 and 2012. We expect PGN to maintain its ratio of total debt to EBITDA between 1.1x and 1.3x.
We expect PGN’s “significant” financial risk profile, as defined in our criteria, to improve. We believe that the company will use its strong cash flows to reduce debt further and meet its capital expenditure requirements. The completion of the West Java pipeline should also facilitate a reduction in its debt-to-capital ratio to 35% or less. An increase in gas prices in Indonesia is unlikely to affect PGN’s margins as the company can pass through the higher costs to consumers.
We assess PGN’s liquidity as “strong” under our criteria. The company’s sources of liquidity will exceed its uses by more than 3x over the next 12 months. We expect liquidity sources to exceed uses even if EBITDA declines by about 30%. Our liquidity assessment is based on the following factors and assumptions:
-- PGN’s has cash of more than US$1.16 billion as of June 30, 2012, excluding restricted cash of about US$2.9 million.
-- We expect PGN to generate about US$800 million in funds from operations annually.
-- The company’s liquidity uses include about US$224 million in short-term liabilities (including debt maturing in 12 months), accrued liabilities, and trade payables.
-- We also assume PGN will spend about US$204 million in capital expenditure during the next 12 months.
-- PGN’s liquidity is likely to remain strong in the next two to three years because rising demand for gas should ensure solid cash flows.
-- Strong liquidity should result in the company internally funding most of its planned capital expenditure. PGN is in compliance with the financial covenants on interest cover, liquidity, and leverage in its loan documents.
-- The company has good relationships with banks and a good standing in the credit market.
The stable outlook reflects PGN’s stable business and cash flows.
We may lower the rating if: (1) we downgrade Indonesia; (2) PGN’s stand-alone credit profile weakens considerably if a significant decline in gas exploration and production in Indonesia diminishes the reliability of gas supplies or lowers pipeline utilization rates; or (3) significant delays or cost overruns in PGN’s capital expenditure plan materially weaken the company’s financial measures, such that the debt-to-EBITDA ratio rises above 4.0x.
We may raise the rating on PGN if: (1) we upgrade Indonesia; and (2) PGN’s stand-alone credit profile improves without a weakening in our assessment of government support. We believe the completion of PGN’s distribution network in West Java should provide the company with the financial flexibility to reduce its debt-to-capital ratio gradually to at least 35%, therefore improving its stand-alone credit profile.