Aug 15, 2011

Fitch upgrades PGN rating to AAA (idn)

Fitch Ratings has affirmed PT Perusahaan Gas Negara's (PGN) long-term foreign-and local-currency issuer default ratings (IDRs) at BB+ and simultaneously revised the outlooks to Positive from Stable. 
PGN's national long-term rating has also been upgraded to AAA(idn) from AA+(idn). The outlook is stable. 
These rating actions follow a review of PGN's operating and financial profiles, including the impact from a potential significant increase to its gas purchase costs. 
"PGN's ratings reflect its dominant position in Indonesia's gas distribution sector and positive domestic demand dynamics. The company has maintained a very strong financial profile for its ratings, with strong free cash generation, low financial leverage and solid liquidity," said Shahim Zubair, Associate Director with Fitch's Asia-Pacific Energy and Utilities team. 
PGN has benefitted significantly from low-cost gas purchases based on long-term contracts; its profit margins, as measured by EBITDA to revenues, have been around 50%. 
Fitch understands that some of PGN's gas suppliers and Indonesia's upstream oil and gas regulator, BPMigas, are seeking to renegotiate prices upwards under existing long-term gas supply contracts with the company. The price revisions sought are significant. 
"Given PGN's market position, Fitch believes that it is strong enough to ensure it can, over time, pass-through a meaningful share of any cost increases to its customers. Even if its profit margins are significantly affected, the company can continue to generate strong positive free cash flows and maintain a financial profile strong for its current ratings," he said.
The company's financial and business profile is so strong that its IDRs are constrained by the ratings of its 57% majority shareholder, the government of Indonesia (BB+/positive).  
Therefore any changes in the sovereign ratings will lead to a corresponding change in PGN's ratings. PGN controls about 90% of Indonesia's gas distribution infrastructure. 
Furthermore, selling prices of natural gas are still at a significant discount to most alternative fuels. The flexibility in the sales price is supported by the very high share of sales that are negotiated on a business-to-business basis with its industrial and power generation customers; around 98% of PGN's revenues are to customers that do not currently come under regulatory price intervention. 
PGN's liquidity is very strong. Its free cash flow (FCF) margin (FCF/revenue) has averaged about 20% over the past three years (pre-dividend FCF margins are around 30%). Given this strong cash generation, PGN's net-indebtedness (total debt net of cash reserves) has been improving and the company had a net cash position of Rp865 billion at 31 March 2011. 
Furthermore, around 90% of its total debt is long-term with well-spread out maturities. PGN's net debt/EBITDA leverage has also gradually improved to -0.1x in Q111 (FY07: 2.2x), while FFO interest coverage has improved to 41.1x from 6.1x. 
PGN however faces on-going challenges in relation to securing additional gas supply to meet increased demand from limited domestic gas production. 
Also, the company faces some regulatory risks from potential price revisions to existing long-term gas purchase contracts, and from new regulations issued in 2010 which prioritise domestic gas production to the oil production sector. This has resulted in some of PGN's contractually committed supply volumes being diverted away from the company. 
However, Fitch believes that PGN's robust financial and operating profile sufficiently compensates for these risks at current ratings.

Disclosure: No position at the stock mentioned above.  

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