Moody's assigns Baa2 rating to PLN's drawdown

(Singapore, June 22, 2020) -- Moody's Investors Service has assigned a Baa2 rating to the proposed senior unsecured notes to be issued by Perusahaan Listrik Negara (P.T.) (PLN, Baa2 stable).

The outlook on the rating is stable.

The notes will be issued under PLN's existing USD15 billion senior unsecured medium-term note (MTN) program, which is rated (P)Baa2.

The company plans to use the proceeds to partially fund its capital expenditure requirements and for general corporate purposes.

RATINGS RATIONALE

The ratings for the notes and the MTN program are based on Moody's rating methodology for government-related issuers (GRIs) (February 2020), which combines (1) PLN's standalone credit quality, or Baseline Credit Assessment (BCA) of ba3, and (2) a four-notch uplift based on Moody's assessment that the government of Indonesia (Baa2 stable) would likely provide credit support in times of need, given its 100% ownership of the company.

PLN's ba3 BCA reflects the company's position as Indonesia's only vertically integrated electric utility, including its dominant position in the generation, transmission and distribution businesses. At the same time, the company faces weakening fundamentals, principally driven by a sharp decline in electricity demand over recent months, as well as a continued shortfall in receipts from the government, and is increasingly dependent on government subsidies.

The BCA also reflects PLN's high financial leverage, which has been further elevated by its involvement in the national capacity additions programs, Fast Track programs 1 and 2, and the 35GW program. These programs are expected to increase PLN's debt levels and further pressure its key credit metrics over the medium-to-long term until the programs are completed.

The four-notch rating uplift reflects Moody's expectation of a very high likelihood of government support in times of need. This expectation of support takes into account the government's 100% ownership of PLN and the company's strategically important role in Indonesia's critical power sector.

In terms of environmental, social and governance (ESG) factors, the Baa2 rating also considers PLN's moderate carbon-transition risk, despite 42% of its generation capacity being coal-based, because (1) coal continues to be the cheapest source of electricity generation, (2) there is continued policy support for coal-based additions, and (3) its 100% ownership by the government of Indonesia and significant strategic importance.

The stable outlook reflects the stable outlook on Indonesia's sovereign rating and PLN's strategically important position as Indonesia's only vertically integrated electric utility, as well as its strong government ties.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Moody's could upgrade the rating if Indonesia's sovereign rating is upgraded, given the close link between PLN's rating and the sovereign. PLN's BCA could be raised if retained cash flow/debt rises above 6% on a consistent basis.

Similarly, Moody's could downgrade the rating if Indonesia's sovereign rating is downgraded. Furthermore, a partial privatization of PLN or a meaningful reduction in government subsidies could trigger a downgrade. Moody's could downgrade PLN's BCA if a greater-than-expected proportion of planned capital expenditures are funded with debt, such that retained cash flow/debt falls below 3%-4% on a sustained basis. (ends)