Fitch Assigns PLN's USD and EUR Notes Final 'BBB' Rating

(Fitch Ratings - Singapore - 04 November 2019)--Fitch Ratings has assigned final ratings of 'BBB' to Indonesia-based PT Perusahaan Listrik Negara (Persero)'s (PLN, BBB/Stable) USD500 million 3.375% notes due 2030, USD500 million 4.375% notes due 2050 and EUR500 million 1.875% notes due 2031. The notes are issued under PLN's medium-term note programme.

The assignment of the final ratings follows a review of final documentation that conforms to the draft documentation previously received. The final rating is same as the expected rating assigned on 29 October 2019. The US dollar and euro notes are rated at the same level as PLN's senior unsecured debt as they will constitute the direct, unconditional, unsubordinated and unsecured obligations of PLN.

PLN's rating is equalised with that of Indonesia (BBB/Stable), based on our expectations of a 'Very Strong' likelihood of support under Fitch's Government-Related Entities (GRE) Rating Criteria. PLN's Standalone Credit Profile (SCP) of 'bb+' reflects the state-owned company's monopoly position in Indonesia's electricity-transmission and distribution sector, dominant position in power generation and moderate financial profile. We believe PLN's financial profile is likely to remain affected in the near-term by the large capex plan and the delay in receipt of compensation for cost under-recoveries for non-subsidised customers due to the tariff freeze since July 2017.

Key Rating Drivers

Robust State Linkages: Fitch sees PLN's status, ownership and control by the Indonesian sovereign as 'Very Strong'. The state fully owns PLN, appoints its board and senior management, and directs and approves investments. We also see the support record as 'Very Strong' and believe there is a high likelihood of state support for PLN, which receives subsidies under an exceptionally strong framework in return for meeting the state's public-service obligations. The state is providing equity of IDR6.5 trillion in 2019 and IDR5.0 trillion is expected by PLN in 2020, and the government guarantees about a fourth of PLN's borrowings.

'Very Strong' Incentive to Support: Fitch regards the socio-political implications of a PLN default as 'Very Strong'. A default by PLN would lead to service disruption as the company accounts for the majority of Indonesia's power-generation capacity. A default would also make it difficult for PLN to source feedstock for power generation. In addition, private sector investors' confidence in power availability would be jeopardised. We believe a default would have a 'Very Strong' financial effect on the state as well. PLN is one of Indonesia's key borrowers and an active international and domestic bond issuer.

Reliant on Subsidies: Fitch expects PLN to remain reliant on state support to sustain its operation over the medium term, taking into account our expectation that electricity will continue to be sold below cost to subsidised customers. The state sets PLN's tariffs for subsidised customers at below generation costs, on average. The company is supported through government subsidies, which allow PLN to recover operating and financing expenses, earn a predetermined margin set annually and partly cover investment costs. PLN's EBITDA would be negative if not for the subsidies and compensation income, which combined amounted to about IDR71 trillion in 2018 against EBITDA of IDR67 trillion.

PLN has also received state support in the form of direct loans, two-step loans from multinational agencies, equity injections and guarantees on bank loans for some of its investment projects. We expect these to continue considering PLN's large investment plans. The state has plans to move to a targeted subsidy payment mechanism directly to customers, but we have not factored this into our rating case because we expect delays in its implementation.

Tariff Freeze Increases Subsidies: Subsidies (including compensation income) rose by 34% in 2018 due to an increase in per unit generation costs against frozen electricity tariffs and higher electricity sales volume. The government froze electricity tariffs charged by PLN to both subsidised and unsubsidised customers from July 2017 to end-2019, a period that included general and presidential elections in April 2019. The freeze was to support industrial competitiveness and household disposable income. The state has also capped the benchmark price of coal sold to PLN to contain costs and thereby its subsidy burden.

Delayed Compensation: Fitch expects PLN to receive delayed compensation income from past years along with 2019 compensation over the next four years. Fitch also expects the tariff freeze to end in 2019, in line with initial plans. Continuation of the tariff freeze and significant compensation delays could further stretch PLN's financial profile and thereby have a bearing on its investment plans. PLN has not yet received past years' compensation of approximately IDR30 trillion relating to cost under-recoveries for non-subsidised customers, driving up working-capital requirements and debt levels.

Capex to Remain High: Fitch expects PLN capex to remain high to support the rising power demand in Indonesia. We estimate PLN's capex at IDR80 trillion a year, on average, resulting in a free cash-flow deficit profile over the long term. PLN plans to increase its generation capacity and strengthen transmission and distribution infrastructure, while independent power producers are likely to have a higher share in the planned additional generation capacity.

SCP Assessed at 'bb+': PLN's SCP reflects the company's monopoly in Indonesia's electricity transmission and distribution sectors, dominant position in power generation, regulatory framework allowing cost-plus margins including subsidies, and absence of an independent electricity regulator. The SCP is constrained by PLN's moderate financial profile. We expect PLN's high capex plans and the delays in receiving compensation income to result in funds from operations net leverage increasing above 5.5x (2018: 5.5x) over the next two years before falling below 5.5x in 2021.

Derivation Summary

Tenaga Nasional Berhad (A-/Stable) and Vietnam Electricity (EVN, BB/Positive), like PLN, are monopolies in their respective countries' electricity transmission and distribution sectors. They own and operate the majority of installed power-generation capacity. The IDRs on Tenaga and EVN are also equalised with those of their respective sovereigns - Malaysia (A-/Stable) and Vietnam (BB/Positive) - in line with our GRE Rating Criteria.

Tenaga's status, ownership and control are assessed as 'Moderate', but its support record and expectations along with the state's incentive to support are assessed as 'Strong'. EVN's status, ownership and control and financial implications of default are assessed as 'Very Strong', and the support record and expectations along with the socio-political impact of default are assessed as Strong'. PLN's linkages with the state as well as the state's incentive to support are assessed as 'Very Strong'.

State-owned PT Pertamina (Persero)'s (BBB/Stable) ratings are also equalised with those of the sovereign. Pertamina is Indonesia's national oil company, the sole refiner and the largest fuel retailer. It accounts for over 20% of the country's crude output. Pertamina performs a government-directed public-service obligation by selling certain refined products at below-market prices set by the state, in a similar way to PLN. Pertamina is assessed as 'Very Strong' under each sub-factor of the GRE criteria, same as PLN. (ends)