JAKARTA (TheInsiderStories) – Indonesian publicly listed PT Perusahaan Gas Negara Tbk‘s (IDX: PGAS) proposed acquisition of a 51 percent stake in PT Pertamina Gas (Pertagas), a unit of state-owned energy producer PT Pertamina could substantially weaken its balance sheet, said S&P Global Ratings on Wednesday (04/07).
PGAS is an Indonesia-based company primarily engaged in gas distribution and transmission.
S&P placed its ‘BBB-‘ long-term issuer credit rating PGAS on CreditWatch with negative implications. The agency also placed ‘BBB-‘ long-term issue ratings on the company’s U.S dollar-denominated notes on CreditWatch with negative implications.
“We estimate that PGN’s FFO–to-debt ratio will fall below our downside
trigger of 23 percent following the acquisition in the absence of equity funding or shareholder loans. The acquisition also raises uncertainty over the
company’s long-term leverage tolerance,” said S&P in the latest research.
At the same time, S&P placed ‘BB+’ long-term issuer credit rating on PT
Saka Energi Indonesia on CreditWatch with negative implications. The rating maker placed ‘BB+’ long-term issue ratings on the company’s U.S. dollar-denominated notes on CreditWatch with negative implications. Saka
Energi is a fully owned oil and gas production subsidiary of PGN.
S&P placed PGAS on CreditWatch because we expect the proposed acquisition of Pertagas to substantially increase PGN’s leverage, potentially
weakening its creditworthiness, if the transaction is funded with debt and
The rating agency added,”We are placing our ‘BBB-‘ long-term issuer credit rating on PGAS and our ‘BB+’ long-term issuer credit rating on Saka Energi on CreditWatch with negative implications. PGAS is an Indonesian gas company and Saka Energi is PGN’s subsidiary.”
Furthermore stated,”We expect to resolve the CreditWatch on both PGAS and Saka Energi within the next 30-90 days when the acquisition reaches financial close and clarity on the capital structure and leverage tolerance emerges,” it said.
The proposed acquisition, if funded with cash and debt, would signal that the
management supports a more aggressive financial policy than we previously
anticipated. We expect PGAS’s balance sheet to substantially weaken following the proposed acquisition and estimate that the company’s ratio of funds from operations (FFO) to debt could fall below 20 percent on a sustainable basis.
That level is well below our downside threshold of 23 percent for PGAS. The ratio is also substantially weaker than historical levels, especially before 2015 when it exceeded 60 percent.
The consolidation of PGAS and Pertagas’s businesses is part of the Indonesian government’s drive toward creating larger and stronger state-owned entities to realize synergies and avoid duplication of expensive infrastructure. PGAs plans to acquire 51 percent of Pertagas, another Indonesian gas transmission and distribution company, from Pertamina for Indonesian rupiah 16.6 trillion in cash (equivalent to around US$1.23 billion). Wholly government-owned Pertamina is PGN’s majority shareholder.
PGAS expects to use internal cash and debt for the acquisition, even though it has not yet finalized the funding combination and is still negotiating with
debt providers. PGAS will fully consolidate about $200 million of annual
EBITDA from Pertagas upon completion of the transaction.
PGAS expects the transaction to complete over the next one to two months pending the closure of certain aspects of the transaction, as well as the finalization of acquisition funding.
Sluggish gas demand, especially for industrial customers, and compressed
distribution spreads limit PGAS’s ability to strengthen its organic operating
cash flows through 2019 at the earliest, in our view. We have revised down our base-case assumption of average gross spreads for the company’s gas
distribution to around $2.40 per unit, from $2.50-$2.75 per unit; these
spreads have been declining over the past few years. We also assume that PGAS will continue to invest over the period, especially in its upstream oil and gas operations.
As a result, we expect negative discretionary cash flows of $160 million-US$210 million until 2019 at the earliest. Material debt reduction is unlikely over the period, in particular if the acquisition of Pertagas is debt-funded. However, any equity funding and shareholder loans in the final capital structure can help mitigate some of the expected increase in leverage.
PGAS’s size and scope will marginally strengthen if the proposed acquisition
closes. The combined entity will control nearly 96% of the national gas
infrastructure, and have a wider range of operating assets and greater
PGAS also expects potential synergies of $65 million per year. We have not factored these synergies in our base-case projections at this stage. We believe the company’s likely weaker balance sheet post acquisition will outweigh the earnings benefit from the larger scale and scope.
We believe the transfer of the Indonesian government’s 56.96 percent stake in PGAS to Pertamina in April 2018 is credit neutral because the Indonesian government retains a “golden” share that allows it a say on key corporate decisions.
Both companies have a record of operating independently, have limited operating or financial integration, and no name affiliation. PGN’s role as the key gas company in Indonesia’s energy industry continues to underpin its relationship with the government and Pertamina. Despite the golden share, we believe the government will largely delegate day-to-day oversight and control responsibilities to Pertamina.
We placed our ratings on Saka Energi on CreditWatch with negative implications following a similar rating action on its parent PGN. In our view, the amalgamation of PGN into Pertamina could reduce the strategic rationale for PGAS to fully own an upstream oil and gas operation. However, our base-case assumption is that PGAS will maintain its 100 percent ownership in Saka Energi for the next 12 months at least.
We expect to resolve the CreditWatch on PGAS within the next 30-90 days when the acquisition of Pertagas reaches financial close and we have clarity on PGAS’s capital structure and leverage tolerance.
To resolve the CreditWatch, we will assess PGAS’s long-term financial tolerance, in particular the final funding approach for the acquisition and the company’s commitment and ability to lower its use of debt and to maintain an investment-grade rating.
“We could downgrade PGN, most likely by one notch, if we lower our assessment of the company’s ‘BBB-‘ stand-alone credit profile. This could happen if the acquisition closes and PGAS funds it with a mix of cash and debt, such that its FFO-to-debt ratio stays sustainably below 23% with no prospect of recovery in 2019,” says S&P.
It said: “We may affirm the rating on PGAS if the transaction with Pertagas does not proceed. We may also affirm the rating if PGAS articulates its commitment to an investment-grade rating by: (1) funding the transaction such that it maintains a ratio of FFO to debt above 23 percent on a sustainable basis; or (2) committing to strengthening its balance sheet over the next 18 months.