Release: S&P: Indonesia's PLN Ratings; Proposed Notes Rated 'BB-'

SINGAPORE (Standard & Poor's) June 14, 2007--Standard & Poor's Ratings Services today affirmed its 'BB-' foreign currency rating and 'BB' local currency rating on Indonesia's PT Perusahaan Listrik Negara (Persero) (PLN). The outlook is stable. At the same time, Standard & Poor's assigned its 'BB-' issue rating to the proposed senior unsecured notes to be issued by PLN's wholly owned subsidiary, Majapahit Holding B.V.

 

The notes are irrevocably and unconditionally guaranteed by PLN, which is fully owned by the Indonesian government. As the size and exact terms are being finalized, this issue rating is subject to final documentation.

 

"The ratings on PLN reflect its overall weak financial profile, uncertainties related to tariff revision and timely and adequate subsidy payments for bridging the shortfall in its operating cash flows," said Standard & Poor's credit analyst Anshukant Taneja.

 

In addition, the ratings reflect the risks associated with the funding of PLN's ambitious 9,000 MW expansion plan, its relatively inefficient capacity mix and high cost of generation and substantial foreign currency exposure.

 

PLN owns and operates about 85% of the electricity generation capacity and the entire power transmission and distribution network in Indonesia. For the year ended Dec. 31, 2006, PLN had operating revenues of Indonesian rupiah (IDR) 104.72 trillion, EBITDA of IDR9.64 trillion, and net loss of IDR1.9 trillion.

 

"PLN's credit profile benefits significantly from strong government support, demonstrated through 100% government ownership," Mr. Taneja said. "The company also has regulatory protection, being the only nominated state-owned enterprise under Indonesia's Electricity Act."

 

In addition, PLN gets subsidies as compensation for providing electricity as mandated by the government, he said. "The company's dominant integrated position in the Indonesian electricity sector and the favorable demand outlook also support its ratings," Mr. Taneja noted.

 

Nevertheless, government support for PLN is not guaranteed, considering the relatively inconsistent track record of subsidy payments, limited evidence of cash infusion, and absence of noteworthy attempts to improve the weak financial position of the company. The government's existing practice of offsetting PLN's fuel-purchase payables to state-owned PT Pertamina (Persero) Indonesia against subsidy payments due to PLN exposes PLN to risks of mismatch in cash flows and strained liquidity. The risks increase with rising interest costs and debt levels. The government's intention to revise the subsidy-payment mechanism and ensure direct, timely and adequate cash support for PLN mitigates these risks.

 

"The stable outlook reflects our expectation that the government would step in to support PLN if it faces a cash flow crisis, given its role and its social and political importance as an integral part of government's policy to provide subsidized electricity in Indonesia," said Mr. Taneja. Delays in fine-tuning subsidy-payment arrangements, material reduction in government ownership of PLN, and major restructuring of PLN's integrated operations could place downward pressure on the outlook or the rating. PLN's credit profile and ratings are directly linked to the sovereign credit ratings on Indonesia (foreign currency BB-/Stable/B, local currency BB+/Stable/B), he said.

 

Complete ratings information is available to subscribers of RatingsDirect, the real-time Web-based source for Standard & Poor's credit ratings, research, and risk analysis, at www.ratingsdirect.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com; under Credit Ratings in the left navigation bar, select Find a Rating, then Credit Ratings Search. (end of release)