Singapore — Moody’s Investors Service says that Perusahaan Gas Negara (P.T.)’s (PGN, Baa2 stable) gas distribution margins would remain weak in the next 1-2 years, consistent with the declining trend exhibited in last few years.
Our expectation reflects the falling gas demand from the power generation sector and the reduction in PGN’s ability to price gas because of the new regulations.
“And, while the change in ownership for PGN from the Indonesian government to Pertamina will not alter PGN’s strategic importance to
Indonesia, and as such, government support will likely continue, the
integration is still being devised and its effect on PGN’s financial metrics remains uncertain,” says Abhishek Tyagi, a Moody’s Vice President and Senior Analyst.
Moody’s report explains that gas transmission and distribution volumes for PGN have fallen over the last four years because of a shift towards coal for power generation and weaker demand from industrial users. This situation has weakened PGN’s ability to pass on the increase in gas purchase costs.
PGN is also exposed to the risk of its customers not renewing gas-sales agreements, which are usually short-term in nature with a provision for
By contrast, PGN’s gas-purchase agreements are generally long-term take-or-pay contracts lasting 5-17 years; thereby exposing PGN to the mismatches between the tenor and terms of its sales and supply contracts, especially when demand is on a declining trend.
And, under new regulations enacted in December 2017, the pricing of gas
for distribution to the power sector and other industries will be determined by the government in the future, based on a formula which will cap PGN’s returns. Such a scenario is credit negative, given that PGN was previously allowed to fix the pricing of gas for these customers.
“The financial impact of this regulatory change in pricing will likely become clearer once the government releases the first tariff order,” adds Tyagi.
Moody’s points out that the integration of PGN and Pertamina Gas (Pertagas) is part of a reorganization following the transfer of the government’s stake in PGN to Pertamina (Persero) (P.T.) (Baa2 stable).
Before the reorganization, both PGN and Pertagas showed very similar
financial profiles and a number of options are being considered for the
integration, including a merger and the acquisition of Pertagas by PGN.
Because these options are still open, there is some uncertainty over the
structure of the combined entity.
While the exact financial impact on PGN’s metrics will not be known until
the details of the integration are decided, PGN’s retained cash flow/debt levels will likely stay above the 9%-12% tolerance level for the company’s Baa2 ratings category over the next three years.
As such, PGN will have some headroom within the rating to acquire Pertagas, depending on the final funding structure.