OREANDA-NEWS. S&P Global Ratings said today that it had raised its long-term corporate credit rating on PT Cikarang Listrindo Tbk. to 'BB' from 'BB-'. The outlook is stable. At the same time, we raised our long-term ASEAN regional scale rating on the Indonesia-based power producer to 'axBBB-' from 'axBB+'. We also raised the long-term rating on the US$500 million senior unsecured notes issued by Listrindo Capital B. V. to 'BB' from 'BB-'. Cikarang Listrindo guarantees the notes.

"The upgrade reflects our expectation that Cikarang Listrindo will maintain solid cash flow adequacy through 2018 as its cash flows stay steady and investments moderate," said S&P Global Ratings credit analyst Xavier Jean. "Improving cash generation ability and proceeds from the recent IPO also enhance the headroom in the company's balance sheet to absorb higher spending or additional debt for potential large-scale expansion projects."

The commissioning of Cikarang Listrindo's 280 megawatt (MW) coal-fired capacity, slated for the fourth quarter of 2016, will support the company's profitability, margins, and operating cash flows for the next three years. The project is on time and on budget. It is 86% complete as of June 30, 2016, and the funding for its completion is available. With coal supply agreements signed, we now have better clarity on the cost benefits of the coal-fired capacity, which Cikarang Listrindo intends to use as base-load capacity. We project EBITDA to be a minimum US$240 million in 2017 and US$255 million-US$265 million in 2018 because fuel costs are substantially cheaper than gas-fired capacity. Our earlier forecast was annual EBITDA of about US$200 million. Operating cash flows could reach US$160 million-US$180 million annually in 2017 and 2018, about 20% more than our previous forecast.

Cikarang Listrindo's capital spending will moderate through 2018. We now anticipate capital spending to reduce to a maximum of US$50 million annually in 2017 and 2018 as the coal-fired expansion nears completion. That is lower than our earlier base-case assumption of about US$80 million annually. In our view, Cikarang Listrindo is unlikely to further expand its coal-fired capacity until it has more clarity on the timing of a 1,100MW-1,400MW generation project with General Electric Co. (GE), a U. S.-based conglomerate. We now expect Cikarang Listrindo to broadly breakeven on a discretionary cash flow basis in 2016, improving to about US$50 million annually in 2017 and 2018.

Positive discretionary cash flows, along with about US$170 million in proceeds from the recent IPO, will increase cash balance, lower net debt, and strengthen cash flow adequacy at Cikarang Listrindo through 2018 at least. We forecast the company's ratio of funds from operations (FFO) to debt to exceed 30% comfortably and the ratio of debt to EBITDA to stay well below 2.5x over the period. We also expect Cikarang Listrindo to manage its spending and investments such that its cash flow adequacy stays at around those levels for the next two to three years, even though the company does not publicly articulate its financial policies.

Cikarang Listrindo's proposed project with GE has been a limiting rating factor, given the project size and likely incremental debt requirements. Nevertheless, event risk related to this project has reduced over the past few weeks, in our view. Construction is unlikely to proceed before 2018 at the earliest. The project sponsors also need to tie up funding. We also understand that the project cost is likely to be lower than we had previously anticipated.

"Cikarang Listrindo's strengthened balance sheet can accommodate incremental debt from the project with GE if it goes ahead in its current cost and form," said Mr. Jean. "Debt drawdown would likely be gradual through 2020, so the erosion in the company's cash flow adequacy will be slow."

Cikarang Listrindo's reported operating performance for the six months ended June 30, 2016, was steady amid slowly recovering power demand in the Cikarang industrial estate. EBITDA was flat at about US$89 million compared with the same period in 2015. Cash balance rose to US$226.4 million after Cikarang Listrindo received proceeds from its IPO.

The stable outlook reflects our expectation that Cikarang Listrindo will maintain steady cash flow adequacy through 2018. It also reflects our view that the company's management will remain prudent in its spending decision, maintain moderate leverage, and manage cash outflows such that the company's FFO-to-debt ratio stays comfortably higher than 30% through 2018.

We could lower the ratings if Cikarang Listrindo's cash flow adequacy deteriorates markedly, with a ratio of FFO to debt approaching 20% on a sustainable basis. This would most likely happen if the company undertakes aggressive new investments beyond our base case or it enhances shareholders' return aggressively, such that discretionary cash flows are persistently negative.

Significant operational issues or unscheduled shutdowns impeding operating cash flows for a sustained period could also lead to downward rating pressure. However, we regard this as less likely, given the company's history of sound and stable operating performance.

We view Cikarang Listrindo's moderate generation capacity and single-site concentration, relatively narrow portfolio, and moderate reliance on PT Perusahaan Listrik Negara (Persero) as a power offtaker as limiting factors for a rating upside in the next 12 months. We could raise the rating if the company substantially expands and diversifies its generation capacity while maintaining high margins and a conservative capital structure.