Fitch Affirms Indonesia's Perusahaan Listrik Negara at 'BBB'; Outlook Stable

(Fitch Ratings - Singapore - 27 Sep 2023)-- Fitch Ratings has affirmed Indonesia-based PT Perusahaan Listrik Negara (Persero)'s (PLN) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'BBB' with a Stable Outlook. The agency has also affirmed the senior unsecured rating on PLN's medium-term note programme, the notes issued under the programme, and the US dollar notes issued by its subsidiary, Majapahit Holding BV, and guaranteed by PLN, at 'BBB'.

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 our Government-Related Entities (GRE) Rating Criteria.

PLN's 'bb+' Standalone Credit Profile (SCP) reflects its position as an integrated electricity utility company, with a monopoly in Indonesia's electricity-transmission and distribution sector and dominant position in power generation, a stable regulatory framework and modest financial profile. We expect PLN's EBITDA net leverage to increase gradually to around 4.2x by 2025 (2022: 3.7x), driven by its large capex plans.

Key Rating Drivers

'Very Strong' 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 its 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 provided equity of IDR5 trillion in 2021 and 2022, and guarantees about a fifth of PLN's borrowings.

'Very Strong' Incentive to Support: Fitch regards the socio-political implications of a default by PLN - which accounts for around 66% of Indonesia's power generation capacity and is its sole power wholesaler - as 'Very Strong'. A default would cause nationwide power disruption, as PLN would find it difficult to procure feedstock for power generation and power from independent producers. A default would also have 'Very Strong' financial consequences, as PLN is a key borrower, and may have a significant impact on the availability and cost of financing for the state and other GREs.

Moderate Power Demand: Fitch expects domestic electricity demand to rise moderately by around 3.8% in 2023 (2022: 6.3%) due to a high base in 2022 and headwinds to global economic growth. This factors in our GDP growth estimate of 5% for Indonesia in 2023 amid challenges from rising interest rates and global inflation. We expect electricity demand to average around 5% a year thereafter up to 2026, underpinned by strong economic growth.

Heavy Reliance on Subsidies, Compensation: Fitch expects PLN to remain heavily reliant on state support to sustain its operations over the medium term. We estimate combined subsidies and compensation income of about IDR130 trillion in 2023 (2022: IDR123 trillion), against EBITDA of IDR94 trillion. We expect subsidies and compensation income to remain high, given robust electricity sales growth. The government has maintained the tariff freeze in 2023, which is likely to continue in 2024, resulting in PLN's continued high reliance on state support.

Subsidy reimbursements by the state have generally been timely. The state has also improved on the timeliness of compensation payments following new regulations introduced in 2022, which require quarterly payment of the compensation. PLN's 2022 compensation dues were fully paid by June 2023. Timely payments significantly reduced PLN's working-capital needs during 2022, driving a material improvement in its financial profile. We expect the state to pay compensation within six months.

Robust Tariff Framework, Government Support: PLN is able to recover operating and financing expenses, earn a pre-determined margin set annually, and partly cover investment costs through a combination of tariffs, which are set below cost, and reimbursement by the state. PLN also receives 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.

Maintain Tariff Freeze: We expect the tariff to remain flat in 2024, as an increase would remain politically sensitive with upcoming elections. The government recently announced the tariff will remain unchanged in 4Q23. The sum of subsidies and compensation income increased by 67% in 2022 due to higher electricity sales volume and per unit electricity-supply costs amid higher commodity prices against frozen electricity tariffs. The state has capped the price of coal and natural gas sold to PLN to contain costs, which limits its subsidy burden.

Capex to Stay High: Fitch expects PLN to incur around IDR78 trillion in capex in 2023 (2022: IDR55 trillion) before increasing to around IDR90 trillion-120 trillion a year to 2025 to support the state's power development plan and renewable-energy transition. This is likely to keep net leverage high over the next few years. PLN plans to increase its renewable-energy capacity in line with the Nationwide Electricity Plan 2021-2030 and Just Energy Transition Partnership (JETP) Program, and strengthen its transmission and distribution infrastructure.

Leverage to Rise Modestly: We expect PLN's free cash flow to remain negative over the medium term on its large investments, resulting in EBITDA net leverage increasing to around 4.2x by 2025. This is despite the increasing regularity of compensation payments, with planned tariff revisions from 2025. Slower-than-expected capex, resulting in EBITDA net leverage that is sustained below 4x, can lead Fitch to revise the SCP upwards to 'bbb-'.

Derivation Summary

Vietnam Electricity (EVN, BB/Positive), like PLN, has a monopoly in the domestic electricity transmission and distribution sectors. It owns and operates most of the country's installed power-generation capacity, and its IDR is equalised with the Vietnam sovereign rating (BB/Positive), in line with our GRE rating criteria.

We assess EVN's status, ownership and control and financial implications of default as 'Very Strong', similar to PLN. However, EVN's support record is assessed as 'Strong', compared with PLN's 'Very Strong', because government support for EVN is less consistent and significant. Vietnam's regulatory framework also has a limited record, and there are no regular tariff reviews. We assess EVN's socio-political impact of default as 'Strong', against PLN's 'Very Strong', because EVN's share of generation capacity is lower than for PLN. The financial implications of default for both PLN and EVN are 'Very Strong', as a default would affect the availability and cost of domestic and foreign financing options for the state and its GREs, as both companies are key borrowers.

State-owned PT Pertamina (Persero)'s (BBB/Stable) ratings are also equalised with those of the sovereign. Pertamina is Indonesia's national oil company, and has a near-monopoly in refining and retailing of petroleum products and accounts for a significant share of the country's crude output. Pertamina performs a government-directed public-service obligation by selling refined products at below-market prices, which are set by the state, in a similar way to PLN. We assess Pertamina as 'Very Strong' under each sub-factor of the GRE criteria, the same as for PLN.

Key Assumptions

Fitch's Key Assumptions Within Our Rating Case for the Issuer

- Electricity sales to increase by 3.8% in 2023 and around 5% annually thereafter;

- Cost of coal in line with Fitch's price deck;

- We expect the natural gas price to move closer to the USD6/million British thermal unit capped price based on new regulations;

- Tariff to remain frozen from 2023 to 2024 and to rise annually by 0.5% thereafter;

- Compensation income accrued in 2023 to be received by 2024, and the same applies thereafter;

- Continued appropriate reimbursements for selling electricity below cost;

- Capex of IDR78 trillion in 2023 and average annual capex of approximately IDR90 trillion-120 trillion thereafter;

- Annual dividend payout of IDR1 trillion.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

- Positive rating action on the sovereign, provided there is no significant weakening of the likelihood of state support.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

- Negative rating action on the sovereign

- Significant weakening of the likelihood of support, including weaker government links or lower government reliance on PLN for policy implementation. We see this as a remote prospect in the medium term.

For the sovereign rating of Indonesia, the following sensitivities were outlined by Fitch in our rating commentary of 1 September 2023:

Factors that could, individually or collectively, lead to positive rating action/upgrade:

- Public Finances: A marked improvement in the government revenue ratio in the next few years closer to the level of 'BBB' category peers, including from better tax compliance or a broader tax base, which would strengthen public finance flexibility.

- External Finances: A material reduction in external vulnerabilities, for instance, through a sustained increase in foreign-exchange reserves, a further decline in the dependence on portfolio flows or lower exposure to commodity price volatility.

- Structural: Significant improvement in structural indicators, such as governance standards, closer to those of 'BBB' category peers.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

- External Finances: A sustained decline in foreign-exchange reserve buffers, resulting, for example, from outflows stemming from a deterioration in investor confidence or large foreign-exchange interventions.

- Public Finances: A material increase in the overall public debt burden closer to the level of 'BBB' category peers; for example, resulting from rising fiscal deficits or accumulation of debt by publicly owned entities.

Liquidity and Debt Structure

Adequate Liquidity: PLN's cash balance of IDR52 trillion at end-2022 was adequate to meet its short-term debt maturities of around IDR38 trillion. PLN also benefits from well-spread-out debt maturities, with annual maturities of below IDR40 trillion. We expect PLN to generate around IDR70 trillion-80 trillion in annual cash flow from operations from 2023, but to remain reliant on external funding for its large annual capex plan. PLN had committed facilities amounting to around IDR102 trillion as of end-2022. We believe PLN can secure adequate funding due to its close links with the sovereign.

Issuer Profile

PLN, Indonesia's integrated electric utility company, is wholly owned by the state. It is a monopoly power transmission and distribution player, and accounted for about 66.7%, or 46GW, of the country's total installed generation capacity of 69GW as of end-2022. The company is also a counterparty that purchases power from independent power producers.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

Public Ratings with Credit Linkage to other ratings

The ratings of PLN are directly linked to the credit quality of its parent, the Indonesian sovereign. A change in Fitch's assessment of the credit quality of the parent would automatically result in a change in the rating on PLN. (ends)