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Nov 22 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed the ratings National Long-Term PT Aetra Air Jakarta (Aetra) at ‘A (idn)’ with ProspectsStable. Fitch has also affirmed the ratings of the unsecured debentures Aetra(Bond I/2008) which will be due in 2015 at ‘A (idn)'.
National rankings in the category ‘A’ reflects expectations of default riskare low relative to other issuers or securities in Indonesia. howeverchanges in circumstances or economic conditions may affect the capacity topay on time than the financial commitment shown byhigher rating categories.
Initiator Level Factors
Stable Operations: Aetra rating reflects its business profilestable as the sole distributor of water in the area east of Jakarta. Aetraoperates under a cooperation agreement for 25 years will falltempo in 2023 by PAM Jaya (government water company) to provide supply in the area.
Profitable Operating Environment: a long-term agreement with PAM Jaya gives Aetra monopoly status until the year 2023. In addition, the level ofsubstitution is low because of the quality of ground waterobtained from shallow wells and deep wells limited availability. however,rate never changes over the previous few years and increased tariffslikely will not happen in the near future due to the impact of social andpolitics that may result.
Plenty of Room For Growth: The ratio of the range service from Aetra only about58.7% at the end of September 2013. Fitch believes that Aetra will beexpand the reach of his serve due to limited competition and availabilityreplacement product. Aetra also plans to increase its revenue byreduce the number of non-revenue water (NRW). Aetra has successfully reducedproportion of NRW to 43.3% at the end of September 2013 from 49.6% at the end2010.
Water Supply Risk: Aetra get all of the water supply channel TarumWest, who has a high level of pollution. This often results inreduced production and temporary production halt to the processaddition and removal of sediment. By obtaining supplies of Channels TarumWest also expose Aetra of supply disruptions from the channel.However, Fitch believes that the water quality will be improved with the completion of theBekasi Siphon in December 2013.
Large Capital Expenses: At the end of the agreement, AETRA permissible toassets to PAM Jaya had didepresiasi value. AETRA plancommit substantial capital expenditure because the PAM Jaya sedini may havelimited capacity to buy back the assets. This strategy willresult in high annual capital expenditure of 200 billion rupiah forperiod 2013 to 2017. Fitch considers that AETRA will still produce currentStrong cash to fund a significant portion of its capital expenditure.
Although capital spending is high, Fitch believes that the company willgenerating pre-dividend free cash flow strong from 2014. However, therelikely the company will distribute more cash to shareholders.Debt Management Key to Increase Ratings: Fitch believes that the creditmetrics of Aetra will continue to experience improvement - albeit with shoppinghigh capital and the possibility of a higher dividend payments - to thelevel corresponding to a higher rank. However, given theagreement that will expire in the year 2023, an increase of only rankconsidered if the company demonstrates a strong commitment to startreduce the level of debt at least 2017.
Positive: future developments that may, individually orraise the level of collective inter alia:
- Free cash flow which is positive
- Decrease in FFO adjusted net leverage below 1.75x (at the end of 2012: 1.8 x)sustainable
- Commitment to reduce the level of debt that needs refinancingmaterial no longer exists nearing the end of the agreement.
Negative: future developments that may, individually orlower levels of collective inter alia:
- Increase in FFO adjusted net leverage above 2.5x on an ongoing basis