News Column

Moody's assigns definitive Baa3 to PGN's senior unsecured bonds

May 18, 2014



Moody's Investors Service has assigned a definitive Baa3 rating to Perusahaan Gas Negara's (PGN, Baa3 stable) $1.35 billion senior unsecured bonds.

The rating outlook is stable.

The proceeds will be used for capital expenditures, working capital

requirements and other general corporate purposes.

RATINGS RATIONALE

Moody's definitive rating on this debt obligation follows PGN's completion

of its USD note issuance, the final terms and conditions of which are

consistent with Moody's expectations.

"The successful issuance of PGN's inaugural rated bond will enhance its

liquidity, and strengthen its financing channels in the offshore market,"

says Ray Tay, a Moody's Associate Vice President and Analyst.

On 2 May 2014, Moody's affirmed PGN's Baa3 issuer rating with a stable

outlook and assigned a provisional (P)Baa3 rating with a stable outlook

to its proposed issuance of senior unsecured bonds.

PGN's Baa3 rating reflects the application of Moody's rating methodology

for government-related issuers (GRIs), updated in July 2010, and which

incorporates (1) the company's standalone credit quality, or baseline

credit assessment (BCA) of baa3; and (2) Moody's assessment of the credit

support that the government of Indonesia (Baa3 stable) is likely to

provide in a situation of stress.

"The Baa3 senior unsecured rating is mainly driven by PGN's good pricing

power with a track record of cost pass through, favorable industry

dynamics that offer strong growth potential, and a strong financial

profile that is constrained by sizeable capital expenditure and upstream

business expansion," adds Tay, also the Lead Analyst for PGN.

PGN is ambitious in seeking to expand its upstream business, thereby

increasing its capital expenditure and execution risk. However, Moody's

recognizes the long-term benefits of this strategy as it will help

diversify PGN's business and supply sources. Additionally, the company's

strong financial profile as well as its management strategy and

investment criteria somewhat mitigate the execution risk.

Its BCA also considers the potential volatility in distribution cash flows

owing to the mismatch between its sales contracts and supply contracts.

Under Moody's rating methodology for GRIs, government support for the

company is assessed as "strong" given its strategic role in Indonesia's

gas sector.

Moody's assesses the dependence level as "high" as the credit profiles of

PGN and the Indonesian government are closely linked, given PGN's

domestic focus.

The rating outlook is stable, reflecting PGN's sustained and strong

financial profile, and Moody's expectation that (1) the company can

continue to pass through any cost increases of upstream gas to its

end-users; (2) it will maintain its dominant position in Indonesia's gas

transmission and distribution sector; and (3) its upstream acquisitions

will be measured and sustainable.

The rating could be upgraded if Indonesia's sovereign rating is upgraded

and if PGN's underlying credit quality remains consistent with its

current BCA of baa3. Absent an upgrade to the sovereign rating, an

upgrade to PGN's ratings is very unlikely because the company's revenues

and most of its funding are from domestic sources.

A downgrade is possible if PGN's underlying credit quality deteriorates

because of (1) an unfavorable regulatory environment that hurts its

financial position; (2) an erosion of its dominant market share under a

deregulated environment, with increased pressure on its profit margins

owing to rising competition; and/or (3) changes in the management's

strategy regarding its upstream business, and which deviates from

Moody's expectations.

Its rating could come under pressure if its consolidated credit metrics

weaken, such that debt/capitalization increases beyond 60%-65%, or

retained cash flow/debt falls below 9%-13%, on a sustained basis.

Furthermore, a downgrade of the sovereign rating or a change in the

government's shareholding level and supportive policy towards the gas

industry could prompt a review of its rating. Established in 1965, Perusahaan Gas Negara (PGN) is primarily engaged in

the transmission and distribution of natural gas. Its transmission

business mainly operates under its 60%-owned subsidiary, PT Transportasi

Gas Indonesia, while its distribution business has a strong market share

of 79% as of 31 December 2013.

In the financial year ended 31 December 2013, PGN generated total revenue

of $3.0 billion. Of this, around 92% came from its gas distribution

business, while the remainder mostly came from its transmission business.

PGN is publicly listed, with a market capitalization of $11.5 billion as

of 28 April 2014. The Indonesian government, through the Ministry of

State-Owned Enterprises, owns 57% of the company.


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Source: EMBIN (Emerging Markets Business Information News)


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