Sep 22, 2011

PLN US$2 bio note assigned (P)Ba1

Moody's Investors Service has assigned a provisional (P)Ba1 rating to Perusahaan Listrik Negara's (PLN) proposed US$2 billion global medium-term note (MTN) program.
At the same time, Moody's has affirmed PLN's Ba1 corporate family rating and Ba1 senior unsecured rating. The rating outlook is stable.  The proceeds from the bond issuance will be used for capital expenditure and for general corporate purposes. 
Ratings rationale PLN's ratings are closely linked to the Indonesian government's credit quality, considering PLN's 100% ownership by the Ministry of State-Owned Enterprises (MSOE), its strategic importance as Indonesia's only vertically-integrated electricity utility, and its reliance on government subsidies to ensure its financial viability and operational soundness," said Simon Wong, a Moody's VP/Senior Analyst. 
"We expect the Indonesian government to continue to support PLN through favorable policies, such as public service obligation (PSO) margin adjustments and subsidies," added Wong, also Moody's lead analyst for PLN. 
Moody's believes there is high incentive for the Indonesian government to provide the necessary support to PLN as a default on PLN's non-government debt obligations could lead to a cross default of government-guaranteed bank financing of PLN. 
PLN's financial profile has improved since 2009, returning to a net profit position, achieved by improving its fuel mix, increasing its PSO margin to 8% in 2010 from 5% in 2009 as well as electricity tariff hikes since 1 July 2010, as approved by the government. 
The Indonesian government has mandated PLN to execute two major capacity expansion programmes, namely Fast Track Programmes of about 10,000 MW each, targeted to increase much needed generation capacity in Indonesia as well as improve PLN's fuel mix and efficiency. 
The capex requirements to develop the first Fast Track Programme are substantial and projected at over US$10 billion. 
"While there will be execution risk, we draw some comfort from the fact that this programme has secured over 90% of its financing requirements and is expected to complete by 2014." 
Furthermore, the Indonesian government has provided feasibility guarantees to Independent Power Producers (IPPs) to guarantee PLN's ability to meet its payment obligations under the Power Purchase Agreements (PPAs), which are expected to enhance private sector investment interests under the second Fast Track Programme. 
Given the close link between PLN's rating and the sovereign rating, an upgrade in the latter would lead to a rating upgrade of PLN. Similarly, a downgrade in the sovereign rating would also trigger a rating downgrade for PLN. 
Furthermore, a partial privatization of PLN or any government plan to cease subsidy support, a scenario that Moody's considers unlikely in the near to medium term, would have a negative impact on the rating. 
PLN is an Indonesian state-owned vertically integrated electricity utility with a generation capacity of over 28,300MW, accounting for 85% of the market. 
It is a monopoly operator of transmission and distribution networks and is the country's largest electricity producer. The government, represented by the Ministry of State-Owned Enterprises (MSOE), has complete ownership. 

Disclosure: No position at the stock mentioned above.

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