Fitch affirms Indonesia's PLN at 'BBB-'; outlook stable
Monday, May 25 2015 - 09:27 AM WIB
Equalised with Sovereign: 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 due to PLN's position as one of the most important state-owned entities in Indonesia and the public service obligation the company performs. PLN owns and operates Indonesia's electricity transmission and distribution network, and accounted for 77% of the country's power generated in 2014.
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 margin 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 IDR99trn compared with EBITDA of IDR69trn (including this subsidy) in 2014.
Subsidies received by PLN have not reduced materially despite increases in average electricity tariffs in 2013 and 2014, due to the weakening Indonesian rupiah, which pushed up costs. We, however, expect PLN's subsidy requirements to gradually reduce due to the increasing proportion of lower-cost coal, gas and renewable generation in its additional generation capacity as well as our expectation of increasing tariffs. The Ministry of Energy and Mineral Resources in April 2014 and November 2014 issued decrees to adjust tariffs monthly for certain groups of consumers based on movements in the FX rate, oil price and inflation. Fitch believes the mechanism is aimed at maintaining the actual subsidy requirement within the government's annual subsidy budget.
Government Support: State support will be necessary to sustain PLN's operations over the coming two to three years as Fitch believes electricity would continue to be sold below cost and PLN will have significant negative cash flows due to the large government-mandated investment programmes through 2020. 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.
Moderate Standalone Credit Profile: Fitch considers PLN's standalone credit profile to be a high 'BB', weaker than its state-supported rating of 'BBB-'. Fitch expects PLN to continue generating sizable negative cash flows owing to its large capex programme to boost generation capacity and network assets, and its FFO adjusted net leverage to remain above 5x over the next two to three years (4.4x in 2014).
Adequate Liquidity: Including government subsidies, we expect PLN's internal cash generation and liquidity to be sufficient to comfortably manage its debt maturities, which currently do not exceed IDR35trn a year. As at end-2014 PLN had IDR27trn of cash and cash equivalents against current debt maturities of less than IDR19trn. Fitch also expects PLN to be able to generate IDR30trn to IDR40trn of operational cash flows per year. PLN, would however, require external funding to manage its large annual capex targets. We believe the company can secure adequate funding given its position as an entity closely linked to the sovereign. (ends)