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Sub-sector: Independent Power Producers
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Fundamental View
AS OF 04 Jun 2024PLN enjoys extremely strong ties with the Government of Indonesia (GoI) given its critical policy role of electrifying the nation.
We see a modestly poorer FY24 credit outlook as resilient domestic power demand, flattish power tariffs and insulation from input cost volatility are offset by sizable capex for coal and renewable capacity additions.
President Prabowo’s plans to tamp down on PLN’s monopoly could induce longer-term regulatory uncertainties.
Business Description
AS OF 04 Jun 2024- PLN is involved in the entire electricity value-chain, from power generation, to transmission, distribution and retail.
- It alone accounts for 76% (~47 GW) of Indonesia's generation capacity (of which 8 GW is renewable capacity), while IPPs provide the remainder.
- The company controls and operates the entire transmission and distribution network in the country. It is the sole buyer of electricity produced by IPPs, through power purchase agreements (PPAs).
- It sells electricity to well-diversified off-takers – 41% to households, 25% to industrial customers, 21% to businesses and 12% to others.
- Since 2015, the GoI has gradually implemented monthly tariff adjustments for 13 customer groups, so that rates charged to customers are better matched with production costs.
- However, under the Public Service Obligation (PSO), the company will continue to sell electricity at subsidized rates of 50% to 450-volt amperes (VA) power households and 25% to 900 VA power households. The GoI subsequently reimburses the company for the difference between the subsidized tariff rate and production cost, typically within 2-3 months.
Risk & Catalysts
AS OF 04 Jun 2024The company provides subsidized electricity to certain households for which it subsequently receives reimbursements from the GoI; though these payments tend to get delayed during major events such as COVID-19 pandemic.
In order to increase the country’s electrification ratio to 97%, the company had been mandated by the GoI to develop large electricity capacities through the Fast Track II and 35,000 MW Programs. Implementation of such complex programs has required significant capital expenditure, which has led PLN’s FCF to fall deep into the red in recent years and created a funding gap.
The success of the above programs is also contingent on the company’s ability to source coal cheaply, select quality contractors, acquire land rights and receive adequate subsidy reimbursements from the GoI.
Being primarily a thermal power producer, PLN may be viewed unfavourably from an ESG perspective.
Key Metric
AS OF 04 Jun 2024| IDR bn | FY19 | FY20 | FY21 | FY22 | FY23 |
|---|---|---|---|---|---|
| Debt to Book Cap | 32.5% | 32.2% | 29.7% | 28.9% | 27.8% |
| Net Debt to Book Cap | 29.1% | 28.2% | 26.9% | 25.2% | 23.7% |
| Debt/Total Equity | 48.1% | 47.4% | 42.2% | 40.7% | 38.5% |
| Debt/Total Assets | 28.2% | 28.1% | 25.7% | 24.6% | 23.4% |
| Gross Leverage | 5.6x | 5.5x | 5.0x | 4.2x | 4.3x |
| Net Leverage | 5.0x | 4.8x | 4.6x | 3.7x | 3.7x |
| Interest Coverage | 2.6x | 2.5x | 3.2x | 4.3x | 3.6x |
| EBITDA Margin | 27.8% | 29.0% | 28.0% | 30.1% | 26.4% |
CreditSight View Comment
AS OF 04 Jun 2024We have an Underperform recommendation on PLN. Its shorter-dated and longer-dated bonds trade only 1-20 bp and 15-33 bp wider than Pertamina’s similar maturity bonds respectively. We see a fair differential of 50-60 bp wider given PLN’s weaker net leverage, smaller EBITDA, higher coal-related ESG risks, poorer FY24 credit outlook, and potential longer-term unfavorable regulatory changes that could be implemented by Indonesia’s new Presidential candidate. We remain comfortable with its resilient credit profile aided by healthy domestic power demand amid flattish power tariffs, and good insulation from thermal coal cost volatility (given PLN has access to domestic coal at a maximum price of $70/ton). Capex for coal and renewable capacity additions could strain FCF and credit metrics.
Recommendation Reviewed: June 04, 2024
Recommendation Changed: December 13, 2023
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Search topics about wealth insights and investments.SMC Global Power
- Sector: Energy
- Sub Sector: Independent Power Producers
- Country: Philippines
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Fundamental View
AS OF 15 May 2024We see lower non-call risk for SMC GP’s c.2025 perps owing to strong near-term parental funding support and its recent c.2024 perp refinancing that suggests management’s ability to source liquidity and willingness to repay the perps.
We remain concerned about non-call risk for SMC GP’s c.2026 perps owing to expectations of constrained parental support, SMC GP’s firmly negative free cash flows, and net cash flow uncertainty of a planned $3.3 bn LNG project.
While SMC GP improved its cost passthrough contractual mix in 2023, the company still remains exposed to high thermal coal input costs (~45-50% of contracts).
SMC GP incurs sizable capex that has led to additional debt incurrence and elevated credit metrics.
Business Description
AS OF 15 May 2024- SMC GP is a leading power generation and distribution company in the Philippines. As at 31 December 2021, its total generation capacity stood at 4.7 GW, accounting for ~20% of the national grid.
- The bulk of its revenues is derived from power generation (~82%), with the remainder from electricity distribution and retailing (~18%).
- It operates 7 power generating plants across diversified energy sources, comprising coal (~62%), natural gas (~25%), hydro (~12%) and battery energy storage (~1%).
- Through long-term power supply agreements and retail supply contracts, SMC GP either sells electricity directly to customers (including large Philippines power distribution company Manila Electric Company, distribution utilities and other industrial customers), or through the Philippine Wholesale Electricity Spot Market.
- SMC GP acts as the Independent Power Producer Administrator (IPPA) for three power plants (~54% of total capacity), where it has the right to sell electricity generated by the IPPs without having to bear large upfront capital expenditures for plant construction and maintenance.
- SMC GP also distributes and retails electricity services through its wholly-owned subsidiary Albay Power and Energy, which distributes power in the province of Albay, Luzon.
- SMC GP is a wholly-owned unlisted subsidiary of San Miguel Corporation, one of the largest and most diversified conglomerates in the Philippines based on total revenues and assets.
Risk & Catalysts
AS OF 15 May 2024We remain concerned about non-call risk for SMC GP’s c.2026 perps owing to expectations of constrained parental support and SMC GP’s firmly negative free cash flows.
A moderate portion of SMC GP’s off-take contracts (~45-50%) do not contain cost pass-through mechanisms. This exposes the company to a rise in thermal coal input costs that could squeeze its EBITDA margins.
We are watchful of a failure to extend its 480 MW and 330 MW emergency power supply agreements (EPSAs) by mid-2024.
SMC GP incurs sizable capex that has spurred additional debt incurrence. Consequently, its credit metrics remain elevated.
Over 88% of SMC GP’s installed capacity is thermal coal or gas-fired, which may be viewed unfavorably from an ESG perspective.
Key Metric
AS OF 15 May 2024| PHP bn | FY21 | FY22 | FY23 | 1Q23 | 1Q24 |
|---|---|---|---|---|---|
| Debt to Book Cap | 66.7% | 69.2% | 62.8% | 65.9% | 63.0% |
| Net Debt to Book Cap | 57.7% | 66.4% | 59.4% | 63.8% | 59.1% |
| Debt/Total Equity | 199.9% | 224.6% | 168.7% | 193.2% | 170.0% |
| Debt/Total Assets | 79.2% | 79.0% | 73.8% | 76.1% | 72.7% |
| Gross Leverage | 10.5x | 19.4x | 13.0x | 18.2x | 12.6x |
| Net Leverage | 9.1x | 18.6x | 12.2x | 17.7x | 11.9x |
| Interest Coverage | 2.5x | 1.4x | 2.2x | 1.5x | 2.2x |
| EBITDA Margin | 35.9% | 13.2% | 26.4% | 25.6% | 27.3% |
CreditSight View Comment
AS OF 15 May 2024We maintain our Market perform recommendation on SMC GP and prefer both the c.2025 perps. We acknowledge SMC GP’s healthier FY24 credit outlook aided by an improved cost pass-through mix, contribution from new capacities, and lower capex. The refinancing of the c.2024 perp with a new $800 mn privately placed perp also improves perception of refinancing risk. Coupled with parental funding support from SMC, we expect SMC GP could cover its perp redemptions to end-2025. We remain concerned about non-call/extension risks on the c.2026 $ perps amid firmly negative free cash flows, potentially constrained parental funding support ahead (due to SMC’s own sizable airport and infra capex), and an unclear net cash flow impact of its proposed $3.3 bn LNG project.
Recommendation Reviewed: May 15, 2024
Recommendation Changed: April 17, 2024
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