Moody's affirms Cikarang Listrindo's Ba2 ratings; outlook remains positive

(Singapore, November 04, 2020) -- Moody's Investors Service has affirmed Cikarang Listrindo (P.T.)'s (Cikarang) Ba2 corporate family and senior unsecured bond ratings.

The outlook on all ratings remains positive.

RATINGS RATIONALE

"Cikarang's Ba2 ratings reflect its market position as the sole private supplier of electricity to five industrial estates in West Java in Indonesia and its diversified and good quality customer base, which we believe will underpin a gradual recovery in energy sales in its catchment area as the economy recovers post-pandemic," says Spencer Ng, a Moody's Vice President and Senior Analyst.

Cikarang's credit profile also benefits from our expectation that the company will maintain strong financial metrics in 2021 and beyond, solid operating track record and supportive features in its power supply agreements with customers, which help mitigate its exposure to fluctuations in fuel costs.

These credit strengths offset the company's reliance on shorter-term fuel supply from third parties to meet its generation needs, although Cikarang has successfully secured contract extensions in the past.

"The positive rating outlook reflects our expectation that power demand will recover in 2021 and will likely support the strengthening of financial metrics to levels that will put upward momentum on the rating," adds Ng.

In the first half of 2020, sales to industrial customers declined by 14.5% as a result of the economic slowdown caused by the pandemic and social distancing restrictions, which slowed manufacturing activities in the industrial estates. As a result, Moody's estimates that Cikarang's retained cash flow (RCF)/debt will fall to slightly below 11% in 2020.

Sales to industrial customers steadily increased after the movement restrictions were lifted in June, and by September, monthly sales recovered to just above 80% of the 2019 level. Moody's believes the recovery is partly due to the resumption of production activities as well as the changes made by manufacturing companies to ensure that they could operate at capacity while complying with social distancing measures.

Under Moody's base case scenario, Cikarang's RCF/debt will likely recover to 14%-17% over the next 12-18 months which, if sustained, will exceed the rating tolerance. Moody's financial projections further assume no material change to the company's capital management initiatives and no material shift in its growth strategy, which is focused on organic growth.

Cikarang has strong liquidity, highlighted by historically high cash holding ($283 million as at end September 2020, including cash deposits), and manageable capex and no debt repayments over the next 12 months.

With regard to environmental, social and governance (ESG) risks, Cikarang has a manageable exposure to carbon-transition risk. Around 75% of Cikarang's generation capacity comes from gas-fired power stations, which are less carbon intensive than coal-fired power stations. Moreover, its management is actively pursuing opportunities to grow rooftop solar generation and the use bio-mass fuel in its sole coal-fired power station.

Moody's expects that changes to Indonesia's energy mix will be gradual, with policies to discourage coal-based additions unlikely in the short term. This reduces Cikarang's exposure to adverse policy changes

Cikarang's exposure to governance risk primarily stems from its concentrated ownership, with three private investment companies holding close to 85% of its equity interest and control over the company's growth and capital management strategy. Moody's considers the potential exposure to governance issues as manageable, as Cikarang has limited transactions with its related parties and has largely maintained a measured approach to shareholder-friendly initiatives, such as share buybacks, which have been mainly funded by cash on hand.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Moody's could upgrade Cikarang's ratings if (1) its RCF/debt rises above 13% on a sustained basis as power demand in the industrial estates gradually returns; and (2) its business profile or capital management philosophy does not change materially.

However, Moody's could change the outlook to stable if Cikarang's operational or financial profile deteriorates, which could arise from a worsening pandemic, a material shift away from its organic growth strategy or a material increase in dividend payments. Specifically, financial metrics that would indicate such a change in the outlook include RCF/debt ranging from 10% to 13% on a sustained basis.

The principal methodology used in these ratings was Unregulated Utilities and Unregulated Power Companies published in May 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1066389. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Cikarang Listrindo (P.T.) is an independent power producer that supplies electricity to over 2,400 industrial customers in five industrial estates in the Cikarang region in the outskirts of Jakarta. The company owns and operates natural gas-fired combined cycle power stations and a coal-fired power plant, with a total combined capacity of 1,144 MW as of 31 October 2020.