Fitch Rates PLN's Proposed USD Notes 'BBB'

(Fitch Ratings - Singapore - 21 Jun 2020)-- Fitch Ratings has assigned a rating of 'BBB' to Indonesia-based PT Perusahaan Listrik Negara (Persero)'s (PLN, BBB/Stable) proposed senior unsecured US dollar notes, to be issued from its existing medium-term note programme. The proposed US dollar notes are rated at the same level as PLN's senior unsecured debt as they will constitute its direct, unconditional, unsubordinated and unsecured obligations.

PLN's rating is equalised with that of Indonesia (BBB/Stable), based on our expectations of a 'Very Strong' likelihood of support, in line with 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 sectors, dominant position in power generation, cost-plus business model and moderate financial profile.

Fitch expects the limited economic activity amid the coronavirus pandemic to result in a 10% decline in electricity sales volume in 2020 (2019: +4.7%). Fitch also expects electricity tariffs to remain frozen over the entire year. According to management, a reduction in capex to IDR53 trillion from the previous plan of IDR80 trillion will help cushion the impact of lower sales and frozen tariffs on PLN's financial profile and the government's subsidy burden. The government will also release IDR48 trillion this year as liquidity support to PLN, against the company's compensation receivables of IDR45 trillion as of end-2019, according to management.

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 has provided equity of IDR6.5 trillion in 2019 and PLN expects to receive an additional IDR5.0 trillion in 2020. The government also 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, Compensation: 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 most of the customers. The state sets PLN's tariffs below electricity supply costs, on average. The company is supported through government reimbursements, 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 IDR74 trillion in 2019 against EBITDA of IDR73 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 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 another 4% in 2019 due to higher electricity sales volume and an increase in per unit electricity supply costs against frozen electricity tariffs. The government froze electricity tariffs charged by PLN from July 2017 to end-2019 - a period that included general and presidential elections in April 2019 - to support industrial competitiveness and household disposable income. The freeze continues in light of the pandemic but management expects tariffs to increase in 2021.

Continuation of the tariff freeze and significant compensation delays could stretch PLN's financial profile and thereby have a bearing on its investment plans or SCP.

Capex to Remain High: Fitch expects PLN capex to remain high from 2021 onwards 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, and regulatory framework allowing cost-plus margins including subsidies. The SCP is constrained by PLN's moderate financial profile. We expect PLN's high capex plans and the delays in receiving additional compensation income to result in its funds from operations net leverage sustain above 5.0x over the next two to three years.

DERIVATION SUMMARY

Vietnam Electricity (EVN, BB/Stable), like PLN, holds monopoly position in Vietnam's electricity-transmission and distribution sectors. EVN owns and operates the majority of the country's installed power-generation capacity. EVN's IDR is also equalised with that of its sovereign - Vietnam (BB/Stable) - in line with our GRE Rating Criteria. 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)