PT Perusahaan Gas Negara And Subsidiary Saka Ratings Affirmed; Outlook Negative On Uncertainty Over Financial Leverage

  • We believe PGN's eventual funding structure and long-term leverage tolerance following its acquisition of Pertagas will be clear only over the next six to 12 months.
  • In our view, a fully debt-funded acquisition will result in a sharp rise in PGN's leverage beyond our downgrade triggers. However, any potential equity funding could alleviate the pressure on PGN's financial position from a likely material increase in leverage.
  • We are affirming our 'BBB-' issuer credit rating on PGN and 'BB+' issuer credit rating on Saka with a negative outlook, and removing the ratings from CreditWatch with negative implications. PGN is an Indonesian gas company and Saka is its upstream oil and gas subsidiary.
  • The negative outlook over the next 12-18 months reflects our expectation of continuing uncertainty over PGN's eventual capital structure and the potential substantial increase in PGN's leverage following the 51% acquisition of Pertagas.
SINGAPORE (S&P Global Ratings) Dec. 6, 2018--S&P Global Ratings said today 
that it had affirmed its 'BBB-' long-term issuer credit rating on PT 
Perusahaan Gas Negara Tbk. (PGN). The outlook is negative. At the same time, 
we affirmed our 'BBB-' long-term issue rating on the company's outstanding 
U.S. dollar-denominated senior unsecured notes. 

Concurrently, we affirmed our 'BB+' long-term issuer credit rating on PT Saka 
Energi Indonesia. The outlook is negative. We also affirmed our 'BB+' 
long-term issue rating on Saka's outstanding U.S. dollar-denominated senior 
unsecured notes. 

We then removed all the ratings from CreditWatch, where they had been placed 
with negative implications on July 4, 2018.

PGN is an Indonesia-based gas distribution and transmission company. Saka is 
PGN's fully owned oil and gas production subsidiary.

We affirmed the rating with a negative outlook to reflect our view of the 
uncertainty that persists over PGN's ultimate capital structure and long-term 
leverage tolerance, following its acquisition of 51% of PT Pertamina Gas 
(Pertagas). PGN says clarity on the final funding structure may only be 
available over the next six to 12 months. In our view, countermeasures such as 
equity raising could still be forthcoming, which if done, should be able to 
arrest the expected sharp increase in PGN's financial leverage. We have 
therefore removed the ratings from CreditWatch.

In our view, PGN's acquisition costs of Indonesian rupiah 16.6 trillion in 
cash (equivalent to around US$1.23 billion) for the 51% stake in Pertagas 
could result in its ratio of funds from operations (FFO) to debt falling below 
our downside trigger of 23% on a sustainable basis. In addition, we do not 
have clarity over the timing, valuation, and impact of PGN's potential 
acquisition of the remaining 49% stake in Pertagas, nor over PGN's potential 
sale of Saka to Pertamina.

Nevertheless, any countermeasures such as potential new equity raising for the 
acquisition could arrest the sharp rise in PGN's financial leverage, help PGN 
maintain its FFO-to-debt ratio above our downgrade trigger of 23%, and support 
a stronger capital structure. 

We believe Saka's recent repayment of US$200 million of shareholder loan to 
PGN is neutral to PGN's and Saka's leverage. This is because we consider the 
shareholder loan for Saka as debt, which has now been partly replaced by 
external debt. PGN fully consolidates Saka as it is a wholly owned subsidiary.

The affirmed ratings reflect the stability of PGN's operating performance. We 
estimate average gross spreads for gas distribution of US$2.40 per unit for 
2019, which is at the higher end of the company's guidance. PGN's operating 
performance in the first nine months of 2018 is slightly better than our 
expectation. Additionally, its cash flows during first nine months benefitted 
from higher gas volumes and healthier hydrocarbon prices in its upstream oil 
and gas businesses. However, we believe high growth for PGN's key industrial 
customers and actual gas spreads of US$2.27 per unit (for the nine months in 
2018) could come under pressure from economic weakness and price pressure from 
large customers like PT Perusahaan Listrik Negara.

On Dec. 4, 2018, PGN announced that it will acquire a 51% stake in the 
remaining four smaller Pertagas subsidiaries, resulting in a revaluation of 
the original acquisition cost of about US$1.23 billion. The company expects to 
finalize the acquisition of the Pertagas group by Dec. 31, 2018, at the 
latest, including the revised valuation and the payment mechanism for the 
acquisition. 

The negative outlook over the next 12-18 months reflects our expectation of 
continuing uncertainty over the eventual capital structure of PGN and 
potential for a substantial increase in PGN's long-term leverage following the 
51% acquisition of Pertagas. The negative outlook also reflects the 
uncertainty over the timing, valuation, and impact of PGN's potential 
acquisition of the remaining 49% stake in Pertagas, and PGN's eventual 
disposal of Saka's upstream assets to Pertamina.

The negative outlook on Saka reflects the negative outlook on its parent, PGN. 

We will lower our rating on PGN if the company's final capital structure and 
long-term financial leverage following the Pertagas acquisition results in the 
company's FFO-to-debt ratio falling below 23% on a sustained basis. We could 
also lower the rating if PGN's capital spending increases substantially beyond 
our base case with no commensurate improvement in cash flows, or PGN's 
operating performance deteriorates beyond our expectations. 

We could also lower our rating if the contribution of higher-risk upstream 
activities increases above 35% of consolidated EBITDA on a sustained basis, 
diluting the contribution from lower-risk gas transmission and distribution 
operations.

We will downgrade PGN if we lower the sovereign credit rating on Indonesia, or 
if we believe government support for the company has weakened.

We will lower our rating on Saka if we downgrade PGN.

We could revise the outlook to stable from negative if the final funding 
structure for the 51% Pertagas acquisition results in PGN's FFO-to-debt ratio 
being more than 23% on a sustainable basis and we have more clarity regarding 
PGN's plan for the remaining 49% in Pertagas, and the disposal or potential 
sale of Saka.

We will revise the outlook on Saka to stable from negative following a similar 
action on PGN.