Fitch Assigns PLN's USD Notes Final 'BBB' Rating

( Fitch Ratings - Singapore - 15 July 2019)--Fitch Ratings has assigned Indonesia-based PT Perusahaan Listrik Negara (Persero)'s (PLN, BBB/Stable) USD700 million 3.875% notes due 2029 and USD700 million 4.875% notes due 2049 final ratings of 'BBB'. The notes are issued under PLN's USD5 billion medium-term note programme.

The assignment of the final ratings follows a review of final documentation that conforms to the draft documentation previously received. The final rating is same as the expected rating assigned on 2 July 2019. The US dollar notes are rated at the same level as PLN's senior unsecured debt as they will constitute the direct, unconditional, unsubordinated and unsecured obligations of PLN.

PLN's ratings are equalised with those of Indonesia (BBB/Stable) to reflect the strong likelihood of support from the government, in line with Fitch's Government-Related Entities Rating Criteria. We assess PLN's standalone credit profile at 'bb+' to reflect its dominant position as a monopoly player in Indonesia's electricity-transmission and distribution sector and owner of the majority of the country's power-generation capacity along with a moderate financial profile. PLN's standalone credit profile is constrained by the need for large capex and the absence of an independent electricity regulatory framework in Indonesia.

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 investments. We also see the support record as 'Very Strong' and believe there is a high likelihood of state support for PLN; the company receives subsidies in accordance with an exceptionally strong framework in return for meeting the state's public-service obligations. About a quarter of PLN's borrowings are guaranteed by the government.

'Very Strong' Incentive to Support: Fitch regards the socio-political implications of a potential PLN default as 'Very Strong'. The company accounts for the majority of Indonesia's power-generation capacity. It would be difficult to source feedstock for power generation in the event of a PLN default and private-sector investors' confidence in power generation would also be jeopardised. We believe a default would also have a 'Very Strong' financial effect on the state. PLN, one of Indonesia's key borrowers, is also an active international and domestic bond issuer. Its rating is equalised with that of Indonesia due to the 'Very Strong' linkages between the two and the state's incentive to support the company.

Tariff Freeze Increases Subsidies: The state sets PLN's tariffs, which, on average, are below generation costs. The company is supported through government subsidies, which allow PLN to recover operating and financing expenses, earn a predetermined margin set annually and partly cover investment costs. PLN's EBITDA would be negative if not for these subsidies, which amounted to about IDR71 trillion in 2018, compared with EBITDA of IDR65 trillion. Subsidies increased by 56% yoy in 2018 due to rising power supply costs against frozen electricity tariffs and higher electricity sales volume. The government froze electricity prices charged by PLN in early 2018 until end-2019, a period that included general and presidential elections in April 2019, to support industrial competitiveness and household disposable income. However, the state has also capped the benchmark price of coal sold to PLN to contain its subsidy burden.

Reliance on Government Support: State support will be necessary to sustain PLN's operation over the coming two to three years, as Fitch believes electricity will continue to be sold below cost and PLN will have significant negative cash flow due to large government-mandated investment plans through to 2021. PLN has also received state support other than subsidies 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. We have not factored the direct subsidy mechanism in our rating case as we anticipate delays in its implementation.

Moderate Standalone Credit Profile: PLN's standalone credit profile of 'bb+', including subsidies on a cost-plus-margin basis, is weaker than its state-supported 'BBB' rating. Fitch expects PLN to generate IDR45 trillion-50 trillion in operational cash flow each year over 2019-2020. However, the company will generate large negative cash flow due to its capex plan to boost generation capacity and network assets. PLN will require external funding to manage its capex target, which Fitch believes it can secure, as it is closely linked to the sovereign. Fitch estimates PLN's FFO adjusted net leverage will stay around 5.5x over the next two to three years (2018: 6.9x).

Derivation Summary

Tenaga Nasional Berhad (A-/Stable) and Vietnam Electricity (EVN, BB/Positive), like PLN, are monopoly plays in their respective countries' electricity transmission and distribution sectors, and own and operate the majority of the installed power-generation capacity. Tenaga's and EVN's Issuer Default Ratings are also equalised with those of their respective sovereigns - Malaysia (A-/Stable) and Vietnam (BB/Positive) - per Fitch's Government-Related Entities Rating Criteria. Tenaga's status, ownership and control are assessed as 'Moderate'. However, its support record and expectations, along with the state's incentive to support, are assessed as 'Strong'. EVN's status, ownership and control and financial implications of default are assessed as 'Very Strong', while the support record and expectations, along with the socio-political impact of default, are assessed as 'Strong'. PLN's linkages with the state, as well as the state's incentive to support, are assessed as 'Very Strong'.

State-owned PT Pertamina (Persero)'s (BBB/Stable) ratings are also equalised with those of the sovereign. Pertamina is one of Indonesia's large crude-oil producers, accounting for over 20% of the country's crude output, and is the nation's sole refiner and dominant retailer of petroleum products. Pertamina, like PLN, performs a government-directed public-service obligation by selling certain refined products at below-market prices set by the state. (ends)