Fitch affirms Indonesia's PLN at 'BBB-'/Stable
Thursday, December 13 2012 - 06:35 AM WIB
PLN's ratings are equalised with those of its sovereign parent, the Republic of Indonesia ('BBB-'/Stable), reflecting strong legal, operating and strategic linkages, as per Fitch's parent and subsidiary linkage methodology.
The affirmation reflects Fitch's view that the state will continue to provide strong financial support PLN 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 been assigned to perform. PLN is the owner and operator of Indonesia's electricity transmission and distribution network and currently accounts for over 80% of the country's power generation capacity. PLN is also the main entity through which the government executes national electricity infrastructure development programmes.
Under the PSO electricity tariffs are set by the state and, on average, are below the company's cost of generation. The government, in return, continues to support PLN through an established subsidy reimbursement mechanism under which the company recovers its operating and financing expenses, and earns a predetermined fee which is set annually, allowing the company to partly cover its investment costs.
Fitch believes that PLN's public service role will remain intact given the substantial investment programme through 2020 and the difficulty of increasing electricity tariffs in Indonesia. Proposed tariff increases in 2011 and 2012 could not be implemented due to popular resistance and any future tariff revisions are unlikely to be sizable enough to ensure PLN's profitability in the absence of subsidy reimbursements. The government is also unlikely to risk significant tariff increases before the presidential elections due in 2014. Fitch, however, expects the requirement for state subsidies to gradually reduce over time with the increase of cheaper coal, gas and renewables generation capacity under its fast-track schemes through 2020, reducing PLN's average generation costs.
In addition to the direct subsidies, PLN has also received tangible state support in the form of direct loans, two-step loans from multinational agencies, equity injections and guarantees for bank loans related to some of its expansion programmes.
Including government subsidies, PLN has adequate internal cash generation and liquidity to manage its debt maturities, which currently do not exceed IDR25trn per annum. As at end-September 2012 PLN had IDR15trn of cash and cash equivalents and about IDR50trn of undrawn bank facilities against current debt maturities of IDR22trn. PLN, however, requires material external funding to manage its large annual capital expenditure targets. Fitch believes the company can secure adequate funding given its position as an entity closely linked to the sovereign. (ends)