Fitch revises outlook on PLN to positive; Affirms at 'BBB-'

(Fitch Ratings-Singapore-22 December 2016)-- Fitch Ratings has revised the Outlook on Indonesia-based PT Perusahaan Listrik Negara (Persero)'s (PLN) Long-Term Foreign-Currency Issuer Default Rating (IDR) to Positive from Stable, and affirmed the IDR at 'BBB-'. A full list of rating actions is at the end of this commentary.

The rating action follows Fitch's revision of the Outlook on Indonesian's sovereign rating to Positive from Stable on 21 December 2016 (see Fitch Revised Indonesia's Outlook to Positive; Affirms at 'BBB-').

Equalised With Sovereign: PLN's ratings are equalised with those of its parent, the Republic of Indonesia (BBB-/Positive), reflecting strong legal, operating and strategic linkages, in accordance with Fitch's parent and subsidiary linkage methodology. The affirmation reflects Fitch's view that strong state support will continue, as PLN is one of Indonesia's most important state-owned entities and performs public service obligations. PLN owns and operates Indonesia's electricity transmission and distribution network, accounting for about 82% of the country's power generation capacity.

Public Service Obligation: The state sets PLN's tariffs, which, on average, are below cost of generation. The government supports PLN through subsidies, under which the company recovers its operating and financing expenses and earns a predetermined margin set annually. This also allows PLN to partly cover investment costs. These subsidies account for a large part PLN's EBITDA; in 1H16, these subsidies amounted to about IDR27trn, compared with EBITDA of IDR29trn (including subsidies).

In 2015 subsidies reduced by 43% due to a 10% average tariff increase and lower fuel costs. Fitch expects the subsidies to decrease further in 2016, mainly due to higher electricity sales volume, higher tariffs and declining fuel costs. In 2014, the Ministry of Energy and Mineral Resources issued two decrees to adjust tariffs monthly for certain consumer groups, based on oil-price movements, inflation and the foreign-exchange rate. Fitch believes this aimed to reduce volatility in the actual subsidy requirement and maintain it within the government's annual budget. The government also plans to change the electricity subsidy scheme from cost-plus-margin to performance-based. According to PLN, the new scheme will take effect from 2018. Fitch expects the move to increase transparency and efficiency.

Government Support: State support will be necessary to sustain PLN's operations 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 flows due to large government-mandated investment plans through to 2020. Apart from subsidies, PLN has also received state support through direct loans, two-step loans from multinational agencies, equity injections and guarantees on bank loans for some of its investment projects.

Moderate Standalone Credit Profile: Including the subsidies on a cost-plus-margin basis, Fitch assesses PLN's standalone credit profile at 'BB+', weaker than its state-supported rating of 'BBB-'. Fitch expects PLN to continue generating sizeable negative cash-flows, owing to its large capex plan to boost generation capacity and network assets, and for FFO-adjusted net leverage to be above 5x over the next two to three years (2015: 4.5x).

Adequate Liquidity: Including government subsidies, Fitch expects PLN's internal cash generation and liquidity to be sufficient to comfortably manage its debt maturities. As at end-June 2016, the company had IDR21trn of cash and cash equivalents against current debt maturities of about IDR45trn. Fitch also expects PLN to generate IDR30trn-45trn of operational cash flows per year. However, it will require external funding to manage its large annual capex targets, which Fitch believes it can secure, given PLN is closely linked to the sovereign. (ends)