(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
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
-- 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