Fitch Ratings assigns PLN with 'BB+' rating
Wednesday, September 21 2011 - 10:07 AM WIB
"PLN's rating reflects very strong legal, operating and strategic linkages with its parent - the government('BB+'/Positive), which warrants an equalization of ratings with those of Indonesia under Fitch's parent and subsidiary linkage methodology," said Sajal Kishore, Director in Fitch's Asia Pacific Energy & Utilities team.
Fitch said PLN's issuer default rating benefits from strong tangible support from the sovereign, in particular, the substantial subsidies it receives through an established mechanism.
As the electricity tariffs that PLN is allowed to charge - approved by the Indonesian Parliament - are below its costs of production, the government pays PLN a compensating subsidy and a public service obligation margin.
This allows PLN to cover its operating expenses, including depreciation, interest and financing costs and to partially meet its capex requirements.
In addition, the government provides support in the form of direct loans at concessional terms, with loans from multinational agencies, equity, through soft loans from its development funds, assistance in fuel supplies by mitigating some of PLN's volume and price risks and guarantees for bank loans related to the first phase of its fast track program.
PLN's dominant generation capacity and position as the owner and operator of the monopoly network and electricity supply businesses underpin its economic and strategic importance to the functioning of the Indonesian economy, Fitch said.
However, its standalone credit profile is weaker than that of its parent due to high leverage levels and exposure to high fuel costs. PLN has a large debt-funded capex program to increase generation capacity and related network assets.
?Provided that project execution risk is successfully managed, PLN's operating margins should improve over the next five years, with new generation capacity fueled by cheaper coal supplies,? Fitch said. (roffie)