Adaro Indonesia PT -- Moody's: Adaro Indonesia's rating able to accommodate parent's acquisition

Moreover, in the long term, the group will benefit from a higher level of geographic diversification, although still within Indonesia.

Adaro Indonesia is a wholly owned subsidiary of Adaro Energy Tbk.

The outlook for the ratings remains stable.

"The proposed acquisition will provide long-term benefits with regard to geographical diversification, while the payment options for the transaction would also provide Adaro Energy with a degree of flexibility, which is important in view of softer-than-expected thermal coal prices", says Simon Wong, a Vice President and Senior Analyst at Moody's. "Such flexibility will place less pressure on the ratings of Adaro Indonesia as it is the principal cash flow generator and borrower of record for Adaro Energy's expansion and diversification strategy."

Adaro Energy announced that on 28 May, 2012 that it has signed an agreement for two options to acquire a controlling stake in BEP.

The first option provides a convertible 3-year loan of up to USD500 million over the next three years, and which may increase Adaro Energy's stake in BEP to 56% from 10.2%.

The second option provides a 3-year share swap option involving 2.39 billion shares in Adaro Energy and a 79.8% stake in BEP, and which would increase Adaro Energy's ownership in BEP to 90%.

The transaction is between related parties as BEP is majority owned by two of Adaro Energy's existing five major shareholders.

No immediate cash injection is required from Adaro Energy. The size and timing of the availability of the convertible loan is at the discretion of Adaro Energy, and is expected to be disbursed in accordance with the capex requirements of BEP over the next three years.

Adaro Indonesia is the principal cash flow generator for Adaro Energy and plays a key role in Adaro Energy's vertical integration strategy. Adaro Indonesia has been a borrower of record (apart from SIS and MBP) and funds have been channeled through Adaro Energy as Guarantor to the wider group for acquisitions as well as for prepayment of services.

Adaro Indonesia's 2012 EBITDA margin is likely to come under modest pressure due to the decline in thermal coal prices, and a slight increase in strip ratios, but the situation could be partially alleviated by lower fuel prices.

"Liquidity is expected to tighten due to lower selling prices and a sizable capex plan that includes the development of recently acquired greenfield coal projects," adds Wong, Moody's lead analyst for Adaro Indonesia. However, as at 31 March, 2012, Adaro Energy has USD511.6 million of cash on hand and USD700 million undrawn loan facilities.

Adaro Energy is projected to incur approximately USD700 million in capex in FY2012 for heavy equipment, construction of an overburden conveyor (including a 2x30MW mine-mouth power plant), a river terminal, a jetty terminal at the IBT port, as well as for the development of Adaro Energy's recently-acquired mines and for maintenance.

"Nevertheless, Adaro Energy has some flexibility over its capex plan. Based on its good track record, we expect the Adaro group to balance its growth ambitions and diversification plans, as well as financial discipline during this period of softening thermal coal prices," says Wong.

BEP has seven coal mining concessions in Kalimantan, which are estimated to have total JORC compliant resources of 9.53 billion metric tons of low-rank coal as estimated by SRK Consulting (Australasia) Pty Ltd.

In 2011, Adaro Energy made three acquisitions in South Sumatra, totaling USD311.5 million, and comprising two greenfield coal projects and an integrated coal logistics service provider.

Although future operating cash flows from BEP and the other projects will not be directly accessible by the lenders to Adaro Indonesia, such investments are expected to be captured under Adaro Energy's guarantee to Adaro Indonesia's loan and bond creditors.

Adaro Indonesia is one of the largest single-site coal producers in the southern hemisphere and one of the world's largest sub-bituminous coal companies. It exports 77.4% of its products to Asia, the US and Europe, while the rest is for the domestic market. It is wholly owned by Adaro Energy, an integrated energy group, listed on the Indonesia Stock Exchange.

Simon Wong Vice President - Senior Analyst Corporate Finance Group Moody'sInvestors Service Singapore Pte. Ltd.50 Raffles Place #23-06 Singapore Land TowerSingapore 48623 Singapore JOURNALISTS: (852) 3758 -1350 SUBSCRIBERS: (65) 6398-8308 Philipp Lotter Associate Managing Director Corporate Finance Group JOURNALISTS: (852) 3758 -1350 SUBSCRIBERS: (65) 6398-8308 Releasing Office: Moody's Investors Service Singapore Pte. Ltd.50 Raffles Place #23-06 Singapore Land TowerSingapore 48623 Singapore JOURNALISTS: (852) 3758 -1350 SUBSCRIBERS: (65) 6398-8308 (C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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