Standard & Poor's: PLN ratings affirmed; outlook stable

(Singapore, April 4, 2014) --Standard & Poor's Ratings Services said today that it had affirmed its 'BB' long-term corporate credit rating on Indonesia-based PT Perusahaan Listrik Negara (Persero) (PLN). The outlook is stable. We also affirmed our 'axBBB-' long-term ASEAN regional scale rating on the company. At the same time, we affirmed our 'BB' long-term program and issue ratings on PLN's US$2 billion global medium-term notes program. We also affirmed our 'BB' long-term issue ratings on the senior unsecured notes that PLN guarantees. Majapahit Holding B.V., a wholly owned subsidiary of PLN, issued the notes.

We affirmed the ratings to reflect our expectation that the likelihood of extraordinary support from the Indonesian government to PLN will remain "extremely high" over the next couple of years.

"We raised the stand-alone credit profile of PLN to 'bb-' from 'b+' because we believe the company's cash flows are improving following an increase in power tariffs in Indonesia and the company's ongoing commissioning of generation capacity," said Standard & Poor's credit analyst Andrew Wong. We expect the contribution of subsidies to PLN's total revenues to continue to reduce following an average 15% increase in electricity tariffs in Indonesia in 2013. Subsidies comprised 39% of total revenues for 2013, compared with 44% in 2012.

The commissioning of power generation capacity under PLN's first fast-track program has improved the company's internal cash flows because its power generation capacity has increased by 30% compared with that in December 2011. We expect the ratio of debt to EBITDA to improve to less than 5.5x for 2013, lower than the average of 6.3x over 2010-2012.

We anticipate that PLN's debt-to EBITDA ratio will improve to a level in line with an "aggressive" financial risk profile category over the next two years due to improved cash flows. Nevertheless, we expect the ratio to remain at the lower end of the category because of the company's continuing significant generation capacity expansion under two fast-track programs. We expect these investments to be partially debt-funded, and project PLN's ratio of debt to EBITDA to be 4.0x-5.0x in 2014-2016. We also expect timely payment of government subsidies.

PLN's ownership and operation of about 83% of Indonesia's electricity generation capacity and the entire power transmission and distribution network in the country supports the company's business risk profile. PLN's non-transparent and inflexible tariff mechanism tempers this strength. Government subsidies somewhat offset the effects of the tariff uncertainty.

PLN's operating efficiency is weaker than peers' and reflects the company's high generation costs because of its inefficient fuel mix, with a high reliance on high-cost oil-fired generation. PLN is undertaking a significant capacity expansion program to improve its fuel mix and reduce the use of fuel oil. PLN's high capital expenditure and associated project commissioning and execution risk constrain its operating efficiency.

"The stable outlook on PLN reflects the outlook on the sovereign credit rating on Indonesia and our expectation of continued government support for the company," said Mr. Wong.

We believe the likelihood of an upgrade is limited over the next 12 months. However, we may raise the rating if we raise the local currency sovereign rating on Indonesia (BB+/Stable/B; axBBB+/axA-2) by a notch or PLN's stand-alone credit profile improves by two notches. (ends)