S&P: "RI's growing electricity consumption to attract more coal producers"

(Singapore, Dec. 4, 2012) -- Indonesian coal producers are likely to step up minority equity investments in domestic power generation capacity over the next three years. That's according to a report, titled "Can Indonesia's Coal Producers Power Growth In The Country's Electricity Capacity? Producers Power Growth in The Country's Electricity Capacity?" that Standard & Poor's Ratings Services published recently. The report analyzes the reasons why Indonesian coal producers are adopting such a strategy and the risks involved.

"The high growth potential for electricity consumption in Indonesia over the next decade and the relatively stable cash flows from power operations make integration into power generation an attractive option for domestic coal producers," said Standard & Poor's credit analyst Xavier Jean.

Coal producers and power producers make suitable allies for a variety of reasons. Coal companies have a long record of reliable operations, large and abundant coal reserves, generally strong cost positions, and Indonesia is shifting toward more efficient coal-based generation capacity. Integration into power generation could also be a hedge against persisting regulatory risks in the domestic mining sector because coal processed domestically into power is not likely to be subject to potential new export taxes.

But coal producers' strategy to integrate into power generation is not without risks, according to the report.

The major risks for domestic coal producers relate to project execution risk, counterparty risk in state-owned PT Perusahaan Listrik Negara (Persero) (PLN; BB/Stable/--; axBBB-/--), and greater exposure to Indonesia's electricity regulations. The long payback period of power generation projects also means that they will take several years to yield any return.

Standard & Poor's believes that robust power purchase agreements between independent power producers and PLN can attract coal producers to take an increasingly proactive role in developing Indonesia's electricity capacity.

"The entry of coal miners into power generation could stimulate the development of new coal mines that will not only leverage Indonesia's comparative advantage in supplying cheap fuel for electricity but also be a potential new source of mining royalty and taxes for the government," Mr. Jean said. (ends)