Sep 21, 2011

Fitch rates PLN with BB+, outlook positive

Fitch Ratings has assigned Indonesia-based PT Perusahaan Listrik Negara (Persero) (PLN) a long-term foreign-currency issuer default rating (IDR) of BB+ with a positive outlook. 
"PLN's rating reflects very strong legal, operating and strategic linkages with its parent - Republic of Indonesia [BB+/Positive], which warrants an equalisation of ratings with those of Indonesia under Fitch's parent and subsidiary linkage methodology," said Sajal Kishore, Director in Fitch's Asia Pacific Energy & Utilities team, in a press statement today.
PLN's IDR benefits from strong tangible support from the sovereign, in particular, the substantial subsidies it receives through an established mechanism. 
As the electricity tariffs that PLN is allowed to charge, approved by the Indonesian Parliament, are below its costs of production, the government pays PLN a compensating subsidy and a public service obligation margin. 
This allows PLN to cover its operating expenses, including depreciation, interest and financing costs and to partially meet its capex requirements. 
In addition, the government provides support in the form of direct loans at concessional terms, with loans from multinational agencies, equity, through soft loans from its development funds, assistance in fuel supplies by mitigating some of PLN's volume and price risks and guarantees for bank loans related to the first phase of its fast track programme.
PLN's dominant generation capacity and position as the owner and operator of the monopoly network and electricity supply businesses underpin its economic and strategic importance to the functioning of the Indonesian economy. 
PLN is critical to the execution of the national electricity policy and for Indonesia to meet its industrialisation and economic growth objectives.
However, its standalone credit profile is weaker than that of its parent due to high leverage levels and exposure to high fuel costs. 
PLN has a large debt-funded capex programme to increase generation capacity and related network assets. 
Provided that project execution risk is successfully managed, PLN's operating margins should improve over the next five years, with new generation capacity fuelled by cheaper coal supplies. 
PLN's rating will be negatively affected by any negative rating action on Indonesia. A negative rating action can also arise if the linkages with the sovereign weaken, although Fitch does not expect PLN's policy role or support from the sovereign to wane in the medium term.
Conversely, PLN's ratings will be upgraded if Indonesia's ratings are upgraded, provided there is no weakening of the legal, operational and strategic ties with the state.

Disclosure: No position at the stock mentioned above.  

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