Fitch Ratings: Timely Support Reinforces Indonesian Energy Giants’ Credit Profiles

(Fitch Ratings-Singapore/Hong Kong-03 August 2022)--The Indonesian government’s prompt payment of compensation due to Pertamina and Perusahaan Listrik Negara (PLN) should provide additional headroom for their standalone credit profiles (SCP) and give them further flexibility to pursue energy transition plans to reduce Indonesia’s carbon emissions, says Fitch Ratings.

Both PLN and Pertamina receive subsidy and compensation payments from the government to offset losses from selling fuel and power to the public at costs materially below market rates. Subsidy and compensation income accounts for a sizeable share of cashflow for both companies. In 2021, for PLN it amounted to IDR74.3 trillion, compared with its EBITDA of IDR79.2 trillion, while for Pertamina it amounted to USD9.4 billion, compared with its EBITDA of USD5.8 billion.

Pertamina confirmed that the government provided a compensation payment of IDR64.5 trillion on 1 July for subsidised fuel and LPG distribution in 2021. This comes in addition to compensation payments of IDR29 trillion in the first four months of 2022. The government also provided PLN with the full compensation payment due for 2021, worth INR24.6 trillion. This follows parliament’s approval of INR275 trillion in additional compensation for Pertamina and PLN in May 2022.

Fitch had expected Pertamina to receive compensation from the government for the sale of subsidised fuels worth around USD2.5 billion (around IDR37 trillion) in 2021 and USD2.9 billion in 2022, with compensation payments spread over a period of three years. The compensation payment for 2021 significantly exceeds our expectation and has been paid more swiftly than we anticipated. This will support the company’s credit metrics, though it will not drive changes to the 'BBB'/Stable rating, which is equalised with that of Pertamina’s parent, the Indonesian state (BBB/Stable).

PLN’s rating is also equalised with the sovereign, but the government’s timely payment of compensation could improve working capital and increase the headroom on its SCP of ‘bb+’. When we affirmed PLN’s rating in August 2021 we stated that headroom on its SCP was low. Headroom on Pertamina’s SCP of ‘bbb-’ was already high.

The prompt payments due to Pertamina and PLN support our view that they are privileged relative to other government-related entities when it comes to receiving state support. This is partly due to our assessments under our Government-Related Entities Rating Criteria of ‘Very Strong’ state linkages through ownership and the sovereign's ‘Very Strong’ record of support provision. It also reflects the government’s ‘Very Strong’ incentive to provide support, as we assess that the implications of a default by either would be damaging to the country’s energy security, with severe effects on socio-economic stability. It would also be very damaging for the country’s financial position as both are major borrowers on local and international debt markets.

The government plans to target power and energy compensation payments more selectively in the longer run, in order to reduce their burden on public finances. It raised power tariffs for non-subsidised households and government offices from July 2022, and Pertamina lifted prices for non-subsidised fuel in April 2022.

The additional cashflow from the government's prompt compensation payments will put Pertamina and PLN in a stronger position, from a credit perspective, to make investments to shift Indonesia’s energy mix as part of efforts to cut carbon emissions. The government aims to raise the share of renewables in the mix to 23% by 2025 and 31% by 2050, from 11.5% in 2021, with a 29% reduction in carbon emissions against a "business as usual" scenario by 2030. This transition would require significant capex that is likely to keep net leverage at both firms high over the next few years. (ends)