Fitch affirms Indonesia's PLN at 'BBB-'; Outlook Stable

(26 May 2014) -- Fitch Ratings has affirmed Indonesia-based PT Perusahaan Listrik Negara's (PLN) Long-Term Issuer Default Rating (IDR) at 'BBB-' with a Stable Outlook. The agency has also affirmed PLN's senior unsecured rating and the rating on its USD2bn global medium-term note programme and notes issued under this programme at 'BBB-'.

PLN's ratings are equalised with those of its parent, the Republic of Indonesia (BBB-/Stable), reflecting strong legal, operating and strategic linkages, in accordance with Fitch's parent and subsidiary linkage methodology. The affirmation reflects Fitch's view that strong state support will continue in the foreseeable future due to PLN's position as one of the most important state-owned entities in Indonesia and the public service obligation (PSO) it has. PLN owns and operates Indonesia's electricity transmission and distribution network, and accounted for 76% of the country's power generated in 2013.

Public Service Obligation: PLN's tariffs are set by the state and on average are below its cost of generation. The government supports PLN through subsidies under which the company recovers its operating and financing expenses, and earns a predetermined fee set annually. This also allows PLN to partly cover its investment costs. PLN's EBITDA would be negative if not for these subsidies, which amounted to about IDR101trn compared with EBITDA of IDR58trn in 2013.

Subsidies received by PLN have increased over the years to over IDR100trn in both 2012 and 2013 from IDR54trn in 2009. While average electricity tariffs increased by about 13% in 2013, this did not reduce the total subsidies PLN received in 2013 because the weakening Indonesian rupiah pushed up costs, which were then compensated through a higher subsidy under its PSO mechanism. Fitch however expects PLN's subsidy requirements to be contained over time with the increasing proportion of lower cost coal, gas and renewable generation under its fast-track capacity addition schemes. The company expects its average tariffs in 2014 to further increase by about 8%.

Government Support: Despite the tariff increases, Fitch believes that strong state support will still be necessary to sustain PLN's operations and the government will continue to extend support. This is due to both the substantial government mandated investment programmes through 2020 and the difficulty of increasing tariffs to a level adequate to allow PLN to operate profitably without state subsidies. PLN has also received state support through direct loans, two-step loans from multinational agencies, equity injections, and guarantees on bank loans, for some of its investment programmes.

Weak Standalone Credit Profile: PLN's standalone credit profile is weak for its state-supported rating of 'BBB-'. Fitch expects PLN to continue generating negative free cash flows owing to its large capex programme to boost generation capacity and network assets.

Adequate Liquidity: Including government subsidies, we expect PLN's internal cash generation and liquidity to be sufficient to manage its debt maturities, which currently do not exceed IDR35trn a year. As at December 2013 PLN had IDR25trn of cash and cash equivalents against current debt maturities of less than IDR20trn. PLN, would however, require external funding to manage its large annual capex targets. Fitch believes the company can secure adequate funding given its position as an entity closely linked to the sovereign. (ends)