Moody's affirms PLN's ratings
Tuesday, July 1 2014 - 12:05 AM WIB
At the same time, Moody's has also affirmed the Baa3 senior unsecured rating of Majapahit Holding BV, PLN's wholly owned subsidiary, which has issued debt guaranteed by PLN.
Moody's also lowered PLN's baseline credit assessment (BCA) to ba2 from baa3, reflecting the standalone credit quality of PLN independent of any extraordinary support from the sovereign.
The ratings outlook is stable.
PLN's Baa3 rating reflects the application of Moody's rating methodology for GRIs (updated in July 2010) that combines: (1) the company's standalone credit quality, or BCA of ba2; and (2) Moody's assessment of the credit support that the government of Indonesia (Baa3 stable) is likely to provide in a distressed situation.
The ba2 BCA reflects the company's strategically important position as Indonesia's only vertically integrated electric utility, including its dominant position in generation and transmission and distribution (T&D), as well as its close linkage with the government. Longstanding subsidies from the government support its financial viability and operational soundness. These positive factors are balanced against a regulatory environment that has historically lacked transparency and allowed returns that are low in comparison to global peers, leading to financial metrics that are inconsistent with an investment grade BCA. PLN's aggressive capital spending programme, while consistent with national strategic objectives to reduce its oil-fired generation, provide minimal leeway for metrics to improve in the medium term.
"Under the rating methodology for GRIs, our assessment of government support for the company is very high. Specifically, the government has 100% ownership and therefore closely directs the activities of PLN. The government also has a strong track record of support, as manifested in its provision of unconditional and irrevocable guarantees on PLN debt related to Fast Track Programme 1; its provision of comfort letters to sponsors of Fast Track Programme 2; and its provision of two-step loans to PLN," says Ray Tay, a Moody's Assistant Vice President and Analyst.
"The government also has a strong incentive to support PLN in case of need, because a default on PLN's non-government debt obligations could lead in turn to a cross-default on the government-guaranteed bank financing for the company," says Tay.
"The lowering of the BCA reflects removal of consideration for extraordinary sovereign support from the standalone view of PLN's credit fundamentals. Although we continue to view the regular subsidies as ordinary support, the benefit of extraordinary sovereign support is now wholly reflected in the uplift as per our approach to rating GRIs," adds Tay.
Moody's notes that Indonesia has embarked on two major programmes for electrical capacity additions totaling 28GW, and PLN has been tasked with the majority of this expansion.
As such, for PLN, the associated capex requirements are substantial, and will -- until the programmes are complete -- pressure its key credit metrics over the next 5-8 years.
However, Moody's notes that PLN has a track record of managing execution risks and has so far commissioned 6.4GW of capacity, and expects it to continue to competently manage these risks.
The ratings outlook is stable, in line with the outlook for the sovereign rating of Indonesia.
Given the close link between PLN's rating and the sovereign rating, an upgrade of the latter may trigger an upgrade of PLN. PLN's BCA could be raised if capex efficiency or debt reduction results in debt/capitalization improving to 75% or lower.
Similarly, a downgrade of the sovereign will almost certainly trigger a downgrade for PLN. Furthermore, a partial privatization of PLN or a meaningful reduction to government subsidies -- a scenario that Moody's considers unlikely in the near to medium term -- will negatively impact the rating. PLN's BCA could be lowered if a greater than expected proportion of planned capital expenditures were funded with debt, such that debt/capitalization increases beyond 85%-90% or retained cash flow/debt falls below 4% to 4.5% on a sustained basis.
The methodologies used in these ratings were Regulated Electric and Gas Utilities published in December 2013, and Government-Related Issuers: Methodology Update published in July 2010. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.
Perusahaan Listrik Negara (PLN) is the only vertically integrated electricity utility in Indonesia. It is the dominant operator of generation plants, transmission and distribution (T&D) networks . Its transmission network covered around 39,581 km and its distribution network covered 809,980 km at end-2013.
PLN is also the country's largest electricity producer, with a capacity of around 39GW, which accounted for 83% of the market at end-2013. It is the sole off-taker for Indonesia's independent power producers. For the 12 months ended 31December 2013, the company reported revenue of IDR257 trillion ($21.1 billion). The government -- through the Ministry of State-Owned Enterprises -- has full ownership. (ends)