Wednesday, 19 June 2019 | 10:51 WIB

Moody’s Upgrades PGN Rating following Acquisition Plan of Pertagas

Illustration: PGN employees working.

JAKARTA, NNC -- PT Perusahaan Gas Negara Tbk (IDX:PGAS) has announced the acquisition plan of 51 percent stakes in PT Pertamina Gas (Pertagas) worth IDR16.6 trillion within the next 90 days.

Decision by PGN's management to fund a third of the acquisition's nominal from internal cash amounting to IDR5.53 trillion and the remaining two thirds from the banking loan of IDR11.06 trillion received a positive response from ratings firm Moody's Investors Service.

Moody's officially upgraded PGN rating to Baa2 with a stable outlook on Friday (7/6/2018). The rating also applies to bonds for the issuer with PGAS stock symbol. The rise was calculated after PGN announced the decision to take 51 percent stakes in Pertagas worth IDR16.6 trillion.

"Moody's understands that PGN plans to fund the acquisition from new debt and internal cash which until March 31, 2018 the amount reached USD1.19 billion," said Vice President and Senior Analyst of Moody's Abhishek Tyagi quoted from his research on Monday (7/9).

Tyagi explained that Moody's decision to raise the debt rating of PGN to Baa2 with stable outlook is based on three fundamental factors. Firstly, although new debt to buy Pertagas shares would undermine the PGN financial matrix, the numbers are still safe because they are higher than the tolerance rate of the ratings in the range of 9-12 percent.

"In recent years, PGN managed to maintain consistent increase in revenue despite the adjustment of gas prices and distribution rates set by the government, so the emergence of new debt burdens is still safe for PGN," said Tyagi.

Second, Moody's considered Pertagas acquisition by PGN will strengthen PGN gas business dominance in Indonesia both in midstream and downstream because after completion of acquisition, PGN will be the only operator who controls the network transmission and distribution of gas in the country.

"The PGN gas pipeline will increase by 30 percent after acquisition. This will support the achievement of operating cost efficiency and corporate capital expenditure in the future," he said.

Until the end of the first quarter of 2018, the length of PGN's gas pipeline reaches more than 7,453 kilometers (km) or equivalent to 80 percent of national gas pipelines. From the infrastructure, PGN distributes natural gas to 196,221 industrial and household customers.

Meanwhile, the length of the pipeline managed by Pertagas reaches 2,438 km. So with the joining of two companies, PGN controls the infrastructure of natural gas pipeline in Indonesia by 96 percent.

Third, the fundamental factor that is not less important is the government support for PGN's business plan in the future as a subsidiary of Oil and Gas Holding Company, that is, PT Pertamina (Persero). The transfer of 56.96 percent of the B series shares owned by the government in PGN to Pertamina some time ago, coupled with the continued control of PGN's A series Dwiwarna shares by the state, according to Moody's, is a guarantee for any corporate actions by PGN corporation in the future.

"We believe that the Government of Indonesia will continue to support PGN to optimize its assets, especially with the control of the dwiwarna share, so the government still has a veto to approve a good strategic decision for the company in the future," said Tyagi.

It is worth noting that Baa2 rating with stable outlook given by Moody's is not only applicable for funding the acquisition of 51 percent of Pertagas shares only, but it includes seeking funding for the acquisition of the remaining 49 percent Pertagas stakes from Pertamina.

"This affirmation of Moody's rating is based on the expectation that in the future PGN will refinance the acquisition of the remaining 49 percent stakes in Pertagas and maintain its financial well," he said.

Meanwhile, Senior Analyst from PT Samuel Sekuritas Indonesia Arandi Ariantara estimates PGN will have no difficulty in seeking external funding of around IDR11.06 trillion to complete the purchase of Pertagas majority shares.

"PGN's net gearing ratio is only 43 percent in 2017, has not reached 100 percent or one time. When it borrowed USD800 million, its net gearing only increased to 91 percent or still not up to one time. So that if it wants to borrow from the bank, it remains strong," said Arandi.

He added that PGN also does business in US dollar denomination. So that the volatility of the rupiah against the dollar did not affect PGN bookkeeping.