Fitch Ratings: Compensation Delays to Pressurise PLN's Standalone Credit Profile

(Fitch Ratings-Singapore-30 April 2020)--PT Perusahaan Listrik Negara (Persero)'s (PLN, BBB/Stable) 'bb+' Standalone Credit Profile (SCP) will be more affected by a delay in compensation payments from the Indonesian government than lower electricity demand and delayed collection from retail customers amid the coronavirus pandemic, says Fitch Ratings. PLN operates under a time-tested cost-plus framework, under which the government reimburses it for a shortfall in its cost plus a margin recovery from its sale of power.

The subsidies - defined as the difference between the cost of supplying power to a subsidised customer, mainly residential, and the tariff charged to the customer - are paid fairly regularly each month through the Electricity Subsidy Payment Mechanism defined in the Ministry of Finance's Regulation Number 174/2019. However, the government froze electricity tariffs in Indonesia from July 2017 to support industrial competitiveness and maintain the population's purchasing power. As a result of the freeze, previously unsubsidised customers now enjoy electricity at a tariff that is below the cost of production and the difference will be reimbursed by the state via the compensation.

We believe commercial and industrial customers account for the majority of PLN's unsubsidised customers. The compensation will be paid by the government in line with the cost-plus framework although the disbursements are not governed by the Electricity Subsidy Payment Mechanism. The government has not paid any part of the compensation yet. The delay and uncertainty over its compensation receivables weigh on PLN's financial profile, against a lack of clarity on future tariff revisions and pressure PLN's current SCP assessment in the absence of a reduction in the group's investment plan.

Power production and purchase costs account for around 70% of PLN's total cost including margins, which is equivalent to its revenue including subsidies and compensation. A 10% decline in electricity sales volume, assuming 40% of power production and purchase costs are fixed, will translate to a 9% decline in cost plus margins and reduce PLN's EBITDA by only 1%-3%, according to our estimates. The impact on PLN's EBITDA (after subsidies and compensation) will be limited to 7% of margin lost on a decline in variable costs due to reduced electricity generation and lower fuel prices, counteracted to an extent by an additional margin on higher interest expense due to more borrowings, in our view.

Fitch expects PLN to record EBITDA and FFO of IDR77 trillion and IDR48 trillion, respectively, in 2020 including subsidies and compensation income of about IDR128 trillion. PLN's measures to control its raw-material costs further may help reduce the government's subsidy and compensation burden, and marginally affect the group's EBITDA and FFO. An incremental delay of 30 days in cash collection from retail customers against a record of less than 35 days will result in an additional IDR17 trillion of working-capital pressure on PLN. Fitch estimates 2020 compensation income will amount to around IDR22 trillion. PLN may record 2020 cash flow from operations of only IDR7 trillion in the absence of any compensation from the government.

Management says PLN has some flexibility in its IDR88 trillion capex plan for 2020 and the company can reduce the outlay to IDR54 trillion. Lower investments will cushion the effect of the increase in receivables from retail customers and the government to an extent. However, Fitch estimates PLN's 2020 FFO net leverage will still increase to 6.2x from 5.7x against our SCP downward revision trigger of 5.5x.

PLN's cash balance of IDR47 trillion at end-December 2019, part receipt of outstanding compensation-related receivables from the government, savings from lower investments and IDR40 trillion of undrawn working-capital facilities are adequate to meet its 2020 debt maturities and interest payments of around IDR60 trillion.

PLN's ratings are equalised with those of Indonesia under Fitch's Government-Related Entities Rating Criteria due to our assessment of a very strong likelihood of state support in light of the group's strategic importance to the national power sector. About 21% of PLN's total borrowings are guaranteed by the government. Some deterioration in PLN's SCP will not affect the group's ratings as long as Fitch's assessment of the likelihood of state support remains intact. However, Fitch may reassess the group's linkages with the state if PLN is left to manage a liquidity crisis on its own. (ends)