Fitch: Indonesia Gas Demand Weakens, Affecting PGN's Performance
Until last year, demand for PGN's gas had risen steadily and the company's growth was in fact constrained by limited gas supply. PGN's gas volumes fell to 790mmcf/d in 1H15, depressed by the lower uptake from industries and power plants, which account for about 97% of its volumes. Indonesia's manufacturing activity shrank for an 11th consecutive month in August, according to the Nikkei/Markit purchasing manager's index (PMI). We expect gas demand to continue to be weak in 2H15.
PGN had previously expected re-gasified LNG (R-LNG) to contribute to volume increases in 2015, after it commissioned a 240mmcf/d plant in Lampung, South Sumatra, in 2H14. However, the terminal has been largely idle this year, despite an allocation of domestic LNG cargoes by the government. Pricing for R-LNG - which is oil-linked - has reduced along with the sharp fall in global oil prices, and this has lowered costs for potential customers. However, the prevailing weak demand dynamics have hindered R-LNG uptake so far this year.
PGN's gas distribution margin was also weak at USD3.5 per million British thermal units (mmbtu) in 1H15, compared with USD3.8/mmbtu in 2014 and over USD4.0/mmbtu in 2012-13. PGN's margins over 2012-14 were boosted by a limited amount of cheap pre-paid gas volumes, which PGN was entitled to receive under its take-or-pay contracts with suppliers. However, the company has exhausted these gas volumes as expected; and Fitch had considered this in its forecasts for PGN. In addition, a weaker Indonesian rupiah against the US dollar also negatively affected PGN's distribution margin as about 20% of its sales is denominated in the rupiah (with the rest in US dollars), while PGN pays for all of its gas supply in US dollars.
Fitch estimates that PGN's adjusted debt to funds flow from operations (FFO) ratio in 2015 could deteriorate to around 3.6x, from 1.8x in 2014, if the weakness in volumes and margin persists. Fitch would consider taking negative rating action on PGN's standalone rating of 'BBB' should its adjusted debt to FFO ratio climb over 4.0x on a sustained basis. PGN's Issuer Default Rating (IDR) of 'BBB-' is constrained by that of its majority shareholder, the Indonesian sovereign (BBB-/Stable).
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