Moody's upgrades Cikarang's ratings to Ba1; outlook stable

(Singapore, November 10, 2021) -- Moody's Investors Service has upgraded Cikarang Listrindo (P.T.)'s (Cikarang) corporate family and senior unsecured ratings to Ba1 from Ba2.

The outlook on the ratings has been changed to stable from positive

"The rating upgrade reflects our expectation that Cikarang will maintain strong liquidity and solid financial metrics on the back of the recovery and subsequent growth in the power consumption in its catchment area," says Yong Kang, a Moody's Analyst.

RATINGS RATIONALE

Cikarang's Ba1 ratings reflect its cash flow visibility, underpinned by its (1) market position as the dominant and only private supplier of electricity to five industrial estates in West Java in Indonesia; (2) diversified and good quality customer base; and (3) supportive tariff structure of its power supply agreements, which helps mitigate its exposure to fluctuations in fuel costs. The company has solid financial metrics and strong liquidity.

Recovery and growth in power demand, stemming from economic activities picking up in Indonesia, will increase the company's earnings over the next 12-18 months, although the uncertainties amid the pandemic still exist.

These credit strengths are counterbalanced by 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.

In the first nine months of 2021, consumption of industrial customers increased 18%, compared with the same period in 2020, mainly because of economic activities recovering after movement restrictions. In addition, Cikarang will benefit from increasing power demand from data center customers, given Indonesia's fast-growing digital economy.

Under Moody's base-case scenario, Cikarang's retained cash flow (RCF)/debt will improve to 14%-17% over the next 12-18 months from 13% in 2020. Moody's financial projections assume no material change in the company's capital structure and financial policy.

Cikarang has strong liquidity, highlighted by its modest capital spending plan and no maturing debt (excluding lease liabilities) over the next 12 months, compared with its ample cash holdings and operating cash flow generation. The company had $326 million of cash as of September 2021.

In October 2021, Cikarang announced that its shareholder meeting approved its plan to refinance its $550 million notes due 2026. However, Moody's does not expect the plan to materially change the company's capital structure and financial management.

With regard to environmental, social and governance (ESG) considerations, Cikarang's exposure to carbon transition risk is partly offset by the fact that 75% of the company's generation capacity comes from gas-fired plants, which are less carbon intensive than coal-fired power plant. In addition, changes to Indonesia's energy mix will likely be gradual to ensure continued affordability of energy prices to consumers.

Cikarang's exposure to governance risks 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 capital management strategy. That said, Cikarang has had no transaction with its related parties in the last five years and has largely maintained a measured approach to shareholder returns.

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

The stable outlook reflects Moody's expectation that Cikarang will maintain its solid financial metrics with cash flow visibility, strong liquidity profile and prudent financial policy over the next 12-18 months.

Moody's could upgrade Cikarang's ratings if the company's credit quality strengthens such that its RCF/debt exceeds 18%-20% on a sustained basis, driven by improving earnings and/or deleveraging.

Moody's could downgrade Cikarang's ratings if the company's credit quality weakens such that its RCF/debt remains below 13% as a result of (1) reduced earnings because of lower-than-expected electricity demand or failure to pass through fuel price fluctuations to customers; (2) a substantial debt increase because of an aggressive expansion plan; or (3) excessive shareholder returns.

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 company that supplies electricity to over 2,500 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 plant and a coal-fired power plant, with a total combined capacity of 1,144 MW as of September 2021. Cikarang is listed on the Indonesia Stock Exchange since 2016, with three Indonesian families owning 85% through three privately held companies. (ends)