RELEASE: S&P affirms B+ on PT Adaro Indonesia

(SINGAPORE Sept. 7, 2006)--Standard & Poor's Ratings Services today affirmed its 'B+' corporate credit rating on PT Adaro Indonesia. The outlook is stable.

At the same time, Standard & Poor's affirmed its 'B+' rating on the senior secured notes issued by Adaro's wholly owned subsidiary, Adaro Finance B.V. The issue is unconditionally and irrevocably guaranteed by Adaro, and its related company, PT Indonesia Bulk Terminal (IBT). Adaro had total assets of US$1.4 billion at March 31, 2006. It is the largest single-mine coal producer in Indonesia, with capacity of 38 million tons per year in 2006 and reserves of at least 14 years.

"The rating on Adaro factors in its aggressive, but improving, financial profile, inherent industry risks, and the uncertain regulatory environment for Indonesia's mining industry," said Standard & Poor's credit analyst Yasmin Wirjawan. "These weaknesses are, however, partially offset by Adaro's low cost profile, secured supply and price contracts, adequate reserve life, and limited currency risk."

Adaro has an aggressive capital structure. The pro forma total debt, which includes mezzanine debt, to capitalization of Adaro and its related companies was 80% at March 31, 2006, while total debt to annualized EBITDA was 4x. Nevertheless, Adaro's profitability is improving, as recently negotiated long-term sales contracts take into account higher spot prices and increased production volume. The group's combined pro forma operating margin was 22% in 2005, supported by higher selling prices of coal, increased production, and better operating efficiency. These, combined with gradual repayment of its debt and mezzanine financing, should allow combined pro forma debt to capital to fall to 60%-70% in the near to medium term, while total debt to EBITDA is projected at 3x. Funds from operations (FFO) to total debt is expected to remain low, averaging 10% due to the high financing cost of the mezzanine debt.

Adaro faces inherent industry risk, as the price of coal is cyclical and subject to volatility. This results in some unpredictability in Adaro's long-term cash flow. In addition, there is limited hedging available for coal prices. Nevertheless, all of Adaro's coal production in 2006 and more than half of its expected production in 2007 are committed under supply contracts at fixed prices. In addition, the outlook for coal prices is favorable, and demand is expected to rise due to growing preference for the use of coal in power generation in some Asian countries. The rating on Adaro also benefits from its competitive production cost of steaming coal, which is one of the lowest in the world because of its open pit mining and low strip ratio.

"The stable outlook on Adaro reflects our expectation that Adaro's steady cash flow will be supported by the favorable outlook for coal prices and the company's ongoing initiatives to improve its operating efficiency," said Ms. Wirjawan.

The outlook or rating on Adaro could be negatively affected if the company pursues growth initiatives at the expense of its debt reduction strategy. In addition, the outlook or rating could be adversely affected by a sharp increase in its cash production cost or softer coal prices, which could lead to weaker financial metrics. Conversely, a revision of the outlook to positive or a rating upgrade would hinge on Adaro's ability to maintain its favorable cost profile, a steady increase in production from existing or new pits, and sustainable improvement of cash flow measures, with FFO to debt of above 20%.(end of release)