JAKARTA (TheInsiderStories) – Moody’s Investors Service affirmed Perusahaan Listrik Negara (P.T.)’s (PLN) Baa2 issuer rating. There is no change in the Baseline Credit Assessment (BCA) of ba2. The outlook on all ratings remains stable.
At the same time, Moody’s has affirmed (P)Baa2 ratings for the senior unsecured MTN programmes of PLN and the Baa2 senior unsecured bonds of PLN. Moody’s has also affirmed the Baa2 senior unsecured ratings for the bonds issued by Majapahit Holding BV, PLN’s wholly owned subsidiary, and guaranteed by the company.
PLN’s Baa2 rating reflects the application of Moody’s rating methodology
for Government-Related Issuers (GRIs) (June 2018) that combines: (1) the
company’s standalone credit quality, or baseline credit assessment (BCA), of ba2; and (2) Moody’s assessment of the credit support that the Government of Indonesia (Baa2 stable) is likely to provide in a distressed situation in light of its 100% ownership of PLN.
“The baa2 BCA reflects the company’s position as Indonesia’s only vertically integrated electric utility, including its dominant position in generation, transmission and distribution (T&D) businesses, and the longstanding subsidies from the government which ensure its financial viability and operational soundness” says Abhishek Tyagi, a Moody’s Vice President and Senior Analyst.
“At the same time, the ba2 BCA is challenged by the weakening fundamentals driven by a tariff freeze for two years, as announced earlier this year, and which constrains PLN’s cash flow generation”, Tyagi says, adding “The tariff freeze increases PLN’s dependence on government subsidies, albeit this is mitigated by the government’s
decision to also freeze the price of coal, which is a material fuel for PLN”.
“PLN’s financial leverage is likely to remain elevated given its involvement in the national capacity additions programs – Fast Track program 1 and 2, and a 35GW program”, Tyagi says.
“We expect these programs to increase PLN’s debt levels and put further pressure on its key credit metrics over the medium-to-long term until the programs are completed”, Tyagi adds.
Other credit challenges include the sharp depreciation of the Indonesian Rupiah, which negatively impacts debt service coverage ratios. The three-notch uplift in the rating reflects the strategic importance of PLN, and our expectation of a very high likelihood of government support in a distressed situation.
Such expectation of support considers the 100% government ownership in PLN, plus the strategically important role that PLN plays in Indonesia’s critical power sector. The government has over time provided performance guarantees in support of some of PLN’s debt.
The stable outlook reflects the stable outlook on Indonesia’s sovereign rating and PLN’s strategically important position as Indonesia’s only vertically integrated electric utility, and its close linkage with the government.
WHAT COULD CHANGE THE RATINGS – UP/DOWN
Given the close link between PLN’s rating and the sovereign rating, an upgrade of the latter may trigger an upgrade of PLN’s rating. PLN’s BCA could be raised if retained cash flow/debt is above 10% on a consistent basis.
Similarly, a downgrade of the sovereign rating 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, and possibly the rating, could be lowered if a greater than expected proportion of planned capital expenditures are funded with debt, and/or if the subsidies from the Government do not fully cover the costs for PLN on a consistent basis. Financial metrics that Moody’s would look for to signal a downgrade in the BCA, and possibly the rating, include retained cash flow/debt falls below 5% on a sustained basis.
Perusahaan Listrik Negara (P.T.) (PLN) is the dominant operator of generation plants, and transmission and distribution (T&D) networks. Its transmission network covered around 48,901ckm and its distribution network covered around 1,028,679ckm at the end of 2017. PLN is also the country’s largest electricity producer, with a capacity of around 42.7GW, which accounted for 76.3% of the market at the end of 2017. It is the sole off taker for Indonesia’s independent power producers.
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