Moody's affirms PGN's Baa2 ratings; outlook stable

(Singapore, June 17, 2021) -- Moody's Investors Service has today affirmed Perusahaan Gas Negara (P.T.)'s (PGN) Baa2 issuer rating and its Baa2 senior unsecured rating.

The rating outlook remains stable.

"The affirmation reflects PGN's solid financial profile and strong liquidity, which should be able to absorb the impact of lower gas demand caused by the pandemic and reduced distribution margins," says Abhishek Tyagi, a Moody's Vice President and Senior Credit Officer.

RATINGS RATIONALE

PGN's Baa2 rating reflects (1) its standalone credit profile, and (2) a one-notch uplift, based on Moody's expectation that the company will receive support from the Government of Indonesia (Baa2 stable), possibly through Pertamina (Persero) (P.T.) (Pertamina, Baa2 stable), in times of need.

PGN's pricing power has declined markedly over the last year due to a series of government interventions to reduce gas prices for several industries, including a directive to cap the price of gas at $6/metric million British thermal unit (mmbtu) for around 60% of its customers. Coupled with tepid growth in gas demand due to the pandemic, Moody's expects PGN's credit metrics to be much weaker compared with 2017-2019 levels. However, the metrics will remain above the threshold for PGN's standalone credit profile.

The profitability of PGN's upstream business will also remain weak because of decreasing production volume and a cut in its capital expenditure, which will lead to a further decline in production from its producing assets.

Over the next 12 to 18 months, PGN's retained cash flow (RCF)/debt is likely to be 15%-20% and interest coverage around 4.0x-4.5x. That said, PGN has a financial buffer to manage its credit metrics within rating expectations.

The stable outlook on the ratings reflects PGN's strong liquidity and Moody's expectation that PGN has financial headroom that will support its ability to navigate through the challenging industry conditions. In addition, Moody's expects PGN to maintain its strategically important position as the country's dominant gas transmission and distribution company, and its role in implementing the Indonesian government's policy decisions.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Moody's could upgrade PGN's ratings if Indonesia's sovereign rating is upgraded, and if PGN maintains its standalone credit strength. An upgrade of PGN's ratings is very unlikely if the sovereign rating is not upgraded, because the company's revenue comes from domestic sources.

A downgrade of Indonesia's sovereign rating will almost certainly trigger a downgrade for PGN. The ratings could also be downgraded if there is a material weakening of PGN's financial profile, including its consolidated debt/capitalization exceeding 60%-65% or its RCF/debt falling below 12% on a sustained basis.

The principal methodology used in these ratings was Regulated Electric and Gas Utilities published in June 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1072530. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

PGN is primarily engaged in the transmission and distribution of natural gas. Its transmission business is mainly operated by two subsidiaries, the 60%-owned PT Transportasi Gas Indonesia and the 51%-owned Pertamina Gas (P.T.) (Pertagas). Its distribution business recorded a strong 89% share of the total distribution volume in Indonesia in 2018, after consolidating Pertagas. (ends)