Fitch Affirms Indonesia's Star Energy Geothermal at 'B+'/Stable
OREANDA-NEWS. Fitch Ratings has affirmed Indonesia-based Star Energy Geothermal (Wayang Windu) Ltd's (SEG) Long-Term Issuer Default Rating (IDR) at 'B+'. The Outlook is Stable. At the same time, the agency has affirmed its USD350m of senior secured notes at 'B+' with a Recovery Rating of 'RR4'.
KEY RATING DRIVERS
Operations Back on Track: SEG's availability and capacity factors have rebounded since the resumption of operations following a four-month shutdown in 2015 due to pipeline damage. Its availability factor (the proportion of time that the plant is online) was again close to 100% in 1Q16, compared with 65% in 2015. Its capacity factor (indicator of plant efficiency) in 1Q16 was over 95%, better than the industry average.
SEG's steam supply has also improved to 529kg/s by end-March 2016, after remaining below the optimal level of 450kg/s for the bulk of the last three years. SEG is in the midst of a make-up well-drilling programme comprising of six wells over 2015-2016 (to make-up for the steam supply decline). We expect the resultant steam-supply boost to be adequate to sustain utilisation rates over the next three years.
Higher Power Tariffs: SEG's power tariff is scheduled to increase by 3.1 US cents per KWh, from around 6 cents per KWh. The company is in the process of amending its energy sales contract (ESC) with PLN to reflect the higher tariff for its units 1 and 2. The revised tariff was approved by the Minister of Energy and Mineral Resources (MoEMR) on 5 April 2016, and higher tariffs would be applicable from that date once the ESC between SEG and PLN is amended.
Improved Financial Profile: The tariff increase would flow through to SEG's EBITDA, and substantially improve its cash flows and financial profile. We estimate SEG's FFO-adjusted net leverage to improve to 3x in 2016 (2015: 5.7x) and around 2x by 2017. SEG's cash balance and cash flows would be more than adequate to support its annual capex averaging around USD40m over 2016-2019 for its existing units, and to meet bond maturities of USD30m-40m per year between 2017 and 2019. We have also factored in SEG's intention to pay out a dividend of USD6m-10m in 2016, which is subject to certain covenants.
Expansion Still Under Evaluation: SEG is still evaluating an additional unit, likely to be of 60 megawatt (MW) capacity. It is in discussions with PLN to negotiate a suitable tariff for power from the new unit. In addition to securing a viable tariff from PLN, the decision to expand would depend on its assessment of adequacy of steam supply after its drilling programme. We estimate that leverage would remain consistent with its rating even if SEG were to decide to go ahead with the capacity expansion.
Single-Site Risk: SEG's ratings are constrained by the fact that its units are at a single location, and the area is seismically active. The single-site risk was evident in 2015 when operations were shut down due to damage to its main pipeline following a landslide in May 2015. However, the risk is mitigated to an extent by extensive insurance coverage which includes damage to property and loss due to business interruption.
Fitch's key assumptions within our rating case for the issuer include:
- Increased tariff for Unit 1 and Unit 2 from April 2016
- Generation recovering to above 1,800GWh from 2016 (2015: 1,112GWh)
- Capex of around USD60m in 2016 related mainly to make-up well drilling, and of around USD16m each in 2017-2018
- No investments for capacity expansion.
Negative: Developments that may, individually or collectively, lead to negative rating action include:
- FFO-adjusted net leverage exceeding 5.0x (2015: 5.7x) and FFO interest coverage falling below 2.0x (2015: 2.2x), both on a sustained basis
- A continued decline in SEG's capacity factor
- A sustained increase in capex to maintain production, leading to weaker cash generation from existing operations.
Positive: Positive rating action is unlikely due to SEG's small scale and single-site operation.