Fitch affirms Indonesia's Star Energy Geothermal at 'B+'/Stable
Monday, May 25 2015 - 10:08 AM WIB
Single-Site Risk: SEG's ratings reflect the geological risks present in operating in a seismically active area and the risk of operating at only one site. The single-site risk was evident when one of its pipelines was damaged following a landslide on 5 May 2015. The ratings of the company are, however, not impacted given the one-off and short-lived nature of the damage caused by the incident.
The damage halted operations of its two power plants, which SEG expects to remain shut for up to four weeks. SEG said its power plants were not damaged by the landslide. Fitch believes SEG's liquidity is robust enough to support the loss of cash generation during the outage; the company had cash balances of USD75m at end-2014, which should be adequate to cover its operational expenses and finance costs until operations resume.
Insurance Mitigates Risk: SEG's insurance policies cover most plant costs, and we expect SEG's insurance to cover the costs of repairs to the damaged pipeline. Although SEG's insurance also includes business interruption coverage of USD75m over two years, it would only apply if operations are interrupted for more than 45 days.
High Earnings Visibility: SEG's energy sales are based on an energy sales contract expiring in 2039 with the state power utility, PT Perusahaan Listrik Negara (Persero) (PLN; BBB-/Stable), which provides for tariff adjustments as exchange rates and inflation change. The sales contract requires PLN to offtake up to 400MW (current capacity is 227MW).
Stable Operations: SEG has operated at an average net capacity factor of broadly over 95% - above the industry average - since it started operations in 2000. Its geothermal resources, which were independently verified, are able to support 287MW of power generation (its existing capacity is 227MW) up to 2039. That said, steam supply was on average less than the optimal amount needed - 450 kilogrammes per second (kg/s) - throughout 2014, which resulted in a slightly lower capacity factor of 95%. SEG's capacity factor averaged about 98% from 2009 to 2013. The company would need to continue to invest in new steam wells to compensate for the decline.
Uncertain Expansion: Currently there are uncertainties associated with SEG's potential expansion. Capex in relation to any significant capacity additions could be substantial in relation to SEG's balance sheet. SEG's geothermal resources support the addition of new capacity, and the company continues to assess the viability of more additions in light of both negotiations to raise tariffs with PLN and subject to results of tests of the permeability of its sub-surface rock.
Adequate Financial Profile: Fitch expects SEG's EBITDA to decline to about USD70m in 2015 from USD87m in 2014 due to the damage to its pipeline, and a two-week scheduled shutdown for maintenance, which happens once in three years. Fitch expects SEG to generate EBITDA of about USD80m-85m a year after 2015. Its recurring capex can be comfortably covered by operating cash flows, and SEG said that it would not pay out any substantial dividends in the medium term, which should help it gradually deleverage over the next few years. SEG's internal cash flows and cash accumulation will be adequate to meet its bond maturities of USD30m to USD40m a year between 2017 and 2019.
Short-Term Rise in Leverage: SEG's funds from operations (FFO)-adjusted net leverage in 2015 will temporarily increase above 5x, the level at which negative rating action may be considered. However Fitch expects SEG to reduce the leverage ratio below 5x by 2016 and continue to deleverage due to positive FCF generation, provided it has no large capex for a new power plant. Should SEG go ahead with an expansion of its capacity, its credit metrics will weaken; however, we anticipate the company to be able to improve its credit metrics within a reasonable period to levels appropriate for its 'B+' ratings. However, negative rating pressure can arise if the company has to spend a substantial amount of capex on drilling new wells to sustain its current level of production and cash generation from existing units. (ends)