S&P: PT Perusahaan Listrik Negara's Proposed Drawdown Under Medium-Term Notes Program Assigned 'BBB' Rating

(SINGAPORE (S&P Global Ratings) Oct. 29, 2019)--S&P Global Ratings today assigned its 'BBB' issue rating to a proposed issuance of senior unsecured notes by Perusahaan Perseroan (Persero) PT Perusahaan Listrik Negara (PLN; BBB/Stable/--). The company will issue the notes under its global medium-term notes (MTN) program, which has been upsized to US$15 billion from US$5 billion.

The rating on the proposed notes and the program reflects the long-term issuer credit rating on PLN.

PLN intends to primarily use the proceeds for its planned capital expenditure (capex) and for general corporate purposes. The drawdown is in line with our expectation of the company's additional debt to fund its high capex plans.

The rating on PLN reflects our view that the Indonesian government would provide timely support to the state-owned utility in all circumstances. We believe PLN plays a critical role in Indonesia's electricity sector, providing subsidized electricity and driving the nation's 100% electrification target. In our view, the government maintains significant influence over PLN through various ministries--giving it multiple avenues to identify risks and provide timely support.

We expect timely subsidy payments to PLN from the government. This supports the company's stand-alone credit profile (SACP) of 'b+'. PLN is also dependent on compensation from the government for a shortfall in revenue due to tariff caps instituted by the government to benefit lower-income citizens. This creates a timing mismatch in cash flows, unlike the monthly subsidy payments the government pays to PLN on a timely basis. The company has about Indonesian rupiah (IDR) 23 trillion of arrears for fiscal 2018 (year ended Dec. 31, 2018), and we expect it to receive this amount in fiscal 2020. Our base case assumes another IDR20 trillion of government compensation for fiscal 2019--which we expect PLN will receive in 2021, given that we believe a tariff revision may happen in 2020. We assume PLN will receive government subsidies and compensation in cash of IDR60 trillion–IDR70 trillion annually over the next two years.

We believe delays in compensation payments expose PLN to liquidity pressures. However, this will be partially offset by the company's access to working capital facilities of about IDR28 trillion, the cost of which is recoverable under the subsidy mechanism.

A weak regulatory environment, and PLN's high leverage and continuing elevated capex weigh on the company's SACP. Our estimate of PLN's annual capex of IDR90 trillion over the next two years is likely to result in negative free operating cash flows. We expect the company's leverage to remain high over the period, with the ratio of funds from operations to debt of 7%-8%.

The stable outlook on PLN for the next 12-24 months reflects the outlook on the sovereign credit rating on Indonesia (BBB/Stable/A-2) and our expectation that the company will continue to benefit from ongoing and extraordinary government support. (ends)