Worker Repair Power Plant Tower - Photo: Special

JAKARTA (TheInsiderStories)– Moody’s Investors Service has assigned a Baa2 rating to the proposed senior unsecured notes to be issued by PT Perusahaan Listrik Negara (PLN, Baa2 stable). The rating outlook is stable.

The notes will be issued under PLN’s existing US$5 billion medium-term note program (MTN) which is rated (P)Baa2. The company plans to use the proceeds to partially fund its capital expenditure requirements and for general corporate purposes relating to its 35,000MW capacity addition program.

Ratings Rationale

The Baa2 ratings for the notes and the MTN program reflect 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 distressing situation in light of its 100 percent ownership of PLN which results in three-notch uplift.

The ba2 BCA reflects the company’s position as Indonesia’s only vertically the integrated electric utility, including its dominant position in a generation, transmission, and distribution (T&D) businesses, and longstanding subsidies from the government ensure its financial viability and operational soundness.

At the same time, the ba2 BCA is challenged by weakening fundamentals, driven by a tariff freeze for two years, in effect till December 2019, and which constrains PLN’s cash flow generation. The tariff freeze increases PLN’s dependence on the government to meet the shortfall in the form of compensation income, although this is partially mitigated by the government’s decision to also freeze the price of coal, which is a material fuel for PLN.

The ba2 BCA also reflects PLN’s high financial leverage, which has been further elevated by its involvement in the national capacity additions programs – Fast Track programs 1 and 2, and a 35GW five-year program. These programs are expected 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.

The three-notch uplift in the rating reflects the strategic importance of PLN, and Moody’s expectation of a very high likelihood of government support in a distressing situation. Such an expectation of support considers the 100 percent 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 percent on a consistent basis.

Similarly, a downgrade of the sovereign will almost certainly trigger a downgrade for PLN. Furthermore, partial privatization of PLN or a meaningful reduction in 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 the 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 to signal a downgrade in the BCA, and possibly the rating, include retained cash flow/debt falling below 5% on a sustained basis.

PLN is the dominant Indonesian operator of generation plants and transmission and distribution (T&D) networks. Its transmission network covered around 53,278ckm and its
distribution network covered around 948,955ckm at the end of 2018. PLN is also the country’s largest electricity producer, with a capacity of around 44.2GW, which accounted for 76.4% of the market at the end of 2018. It is the sole off-taker for Indonesia’s independent power producers.

Written by Willy Matrona, Email: theinsiderstories@gmail.com