Fitch Ratings-Jakarta/Singapore-21 November 2013: Fitch Ratings has affirmed Indonesia-based PT Aetra Air Jakarta's (Aetra) National Long-Term Rating at 'A(idn)'. The Outlook is Stable. The agency has also affirmed Aetra's senior unsecured rupiah bonds (Obligasi I/2008) due in 2015 at 'A(idn)'.

'A' National Ratings denote expectations of low default risk relative to other issuers or obligations in the same country. However, changes in circumstances or economic conditions may affect the capacity for timely repayment to a greater degree than is the case for financial commitments denoted by a higher rated category.

KEY RATING DRIVERS

Stable Operation: Aetra's rating reflects its stable business profile as the sole piped water distributor in the East Jakarta area. The company operates under a 25-year co-operation agreement that expires in 2023 with PAM Jaya (the state water utility) to supply the area.

Favourable Operating Environment: The long-term agreement with PAM Jaya grants Aetra a monopoly status until 2023. In addition, substitutability is also low because of quality issues with groundwater from shallow wells and the limited availability of deep wells. However, the tariff has not risen for the past few years and an increase is unlikely in the near term given the political and social implications.

Ample Room for Growth: Aetra's service coverage ratio was only around 58.7% at end-September 2013. Fitch believes that Aetra will be able to further expand its coverage because of limited competition and a lack of substitutes. Aetra also plans to increase its revenue by reducing the quantity of non-revenue water (NRW). Aetra has managed to reduce the proportion of NRW to 43.3% at end September 2013 from 49.6% at end 2010.

Water Supply Risk: Aetra sources all of its raw water supply from West Tarum Canal (WTC), which is highly polluted. This often results in production losses and downtime at plants for additional processing and sediment removal. Sourcing all of its supply from WTC also exposes Aetra to supply interruption from this canal. However, Fitch believes that water quality will improve upon the completion of the Bekasi Siphon in December 2013.

Large Capex Constraint: Upon contract expiration, Aetra is required to sell its assets to PAM Jaya at a depreciated value. Aetra plans as much capex as early as possible due to PAM Jaya's limited ability to buy these assets back. This strategy will result in a high average yearly capex of around IDR200bn during 2013-2017. Fitch expects Aetra to continue to generate robust cash flows to cover a significant portion of capital expenditure. Notwithstanding this higher capex, we expect the company to have strong pre-dividend free cash flows from 2014. However, it is likely that the company may distribute more cash to shareholders.

Management of Debt Key to Upgrade: Fitch expects Aetra to continue to improve its credit metrics - despite higher capex and possibly higher dividends - to levels comfortable for a higher rating. However, given the concession expiry in 2023, an upgrade may be considered only if the company demonstrates solid commitment to start reducing its indebtedness at least from 2017.

RATING SENSITIVITIES

Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- Positive free cash flow generation
- FFO adjusted net leverage falling below 1.75x (end-2012: 1.8x) on a sustained basis
- A commitment to reducing indebtedness such that any material refinancing is not left towards the end of the concession period

Negative: Future developments that may, individually or collectively, lead to negative rating include:
- Deterioration of FFO adjusted net leverage to over 2.5x on a sustained basis