Fitch Affirms LLPL Capital's (Lestari Banten Energi) Notes at 'BBB-'; Outlook Stable

(Fitch Ratings - Hong Kong - 02 Dec 2020)--Fitch Ratings has affirmed the rating on the USD775 million of 6.875% notes due 2039 guaranteed by Indonesia-based PT Lestari Banten Energi (LBE) at 'BBB-'. The Outlook is Stable. The notes are issued by LLPL Capital Pte. Ltd., a Singapore-domiciled special purpose vehicle that is wholly owned by Lestari Listrik Pte. Ltd. (LLPL), which has a 95% stake in LBE.

RATING RATIONALE

The rating on the notes is underpinned by the highly predictable revenue under LBE's 25-year power-purchase agreement (PPA) with PT Perusahaan Listrik Negara (Persero) (PLN; BBB/Stable) expiring in 2042, pass-through of fuel costs to PLN, the use of commercially proven technology and an experienced in-house management team.

LBE's financial profile under the Fitch rating case shows a profile average annual debt-service coverage ratio (ADSCR) of 1.42x and minimum ADSCR of 1.08x. The achieved average ADSCR is commensurate with the 1.3x 'BBB-' rating threshold applicable for projects that have a 'Stronger' revenue risk attribute in accordance with Fitch's Thermal Power Project Rating Criteria.

KEY RATING DRIVERS

Strong Long-Term PPA: Revenue Risk - Stronger

LBE's PPA with PLN, Indonesia's state-owned utility, provides for fixed-price payments based on the available capacity of the power plant to cover debt service, fixed operations and maintenance (O&M) costs, Indonesian taxes and a return on equity. LBE is not exposed to electricity demand or merchant risks, and is under contract until 2042, beyond the term of the debt. The PPA also provides for energy payments, which are designed to cover variable costs, including coal costs and variable O&M costs. The cash flows are largely independent of dispatch levels. Termination provision is another feature supporting the 'Stronger' assessment. This feature provides for a buyout price adequate to cover the outstanding notes should there be non-remediable events at PLN, government action or inaction, or the exercise of PLN's purchase option.

Proven Technology, Experienced In-House O&M: Operation Risk - Midrange

LBE's single supercritical pulverised coal unit uses conventional commercially proven technology and commenced operations in March 2017. An in-house O&M team runs the plant and expects to continue to operate it under the employment of a designated O&M SPV that will be established and at least 95%-owned by LLPL. The O&M SPV will be established when an investment decision is made to expand the plant by adding a new unit at an adjacent site, which will be undertaken by a separate project company (Banten 2). We expect the O&M agreement to be priced on a cost-plus basis, which we consider to be a feature commensurate with a 'Weaker' assessment for this attribute.

LBE now has an operating history of about four years, during which it outperformed the contractual availability target while the actual heat rates were higher than agreed. However, Fitch is cognizant that the PPA heat rates were aggressively determined partly due to the sponsors' strategy to enhance cost competitiveness of the plant, which has been proven by the plant's high rank on the merit order of PLN's Java-Bali grid in the past.

The plant also benefits from a six-year long-term service agreement with its engineering, procurement and construction contractor, Harbin Electric International Co. Ltd. The service agreement is extendable annually thereafter, providing the plant with continued access to Harbin's technical expertise and the spare parts needed for ongoing maintenance.

A technical due diligence report on the plant was prepared and provided by the independent engineer, Black & Veatch, a reputable engineering consulting company, which validated management's key technical and expense inputs. Black & Veatch also performed a high-level review of the design adequacy of the facilities that LBE and Banten 2 will share and confirmed the expansion plan and sharing of the common facilities will not interfere with the operations of LBE.

The overall 'Midrange' assessment of operation risk reflects the plant's lack of a long proven operational track record as well as cost-plus O&M arrangements, with the cost risks residing with the plant.

Coal Cost Pass-Through: Supply Risk - Midrange

LBE currently has coal supply agreements with two primary suppliers, PT Kideco Jaya Agung and PT Antang Gunung Meratus, reputable coal producers in Indonesia. Coal supply is secured until 2031, shorter than the tenor of the notes, but the abundance of domestic coal production and reputable suppliers mitigate the remaining exposure. Prices are linked to the benchmark price of thermal coal in Indonesia (known as HBA), adjusting for coal specifications as received. The coal-pricing mechanism mirrors the PPA provisions, which are designed to pass through the coal costs to PLN via PPA energy payments, although the effectiveness of cost pass-through is subject to maintaining specified fuel efficiency.

Fully Amortising Project-Financing Debt: Debt Structure - Midrange

The notes are fully amortising and pay fixed interest rates. The issuer maintains a customary six-month debt-service reserve and a major maintenance reserve, both of which have been funded. The notes benefit from a distribution lock-up covenant of 1.2x DSCR, although it is only backward looking, a feature commensurate with a 'Midrange' assessment. The security package is standard and adequate, another 'Midrange' feature. Hence, the overall assessment is 'Midrange'.

PEER GROUP

LBE's closest peer is PT Paiton Energy, which guarantees notes issued by Minejesa Capital BV that are rated 'BBB-' with Stable Outlook.

Paiton, located in eastern Java, is the second-largest independent power producer (IPP) in Indonesia with an installed capacity of 2,045MW (net) for its three-unit power complex. One of Paiton's three units also uses the supercritical pulverised coal technology. Both projects bene?t from long-term PPAs with PLN that have fuel cost effectively passed through to PLN, and both are run by experienced operation teams.

Paiton has a higher overall ADSCR, proven operating track record and economies of scale through its three units. LBE has a much shorter operating record and is more susceptible to a loss of availability due to its single-unit configuration, which does not provide for redundancy. However, LBE is not exposed to a currency mismatch between revenue and debt service, while there is a minor currency mismatch for Paiton, which is considered a weakness. Under Fitch's rating case, Paiton's overall metrics show an average and minimum ADSCR of 1.45x and 1.25x, respectively.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

- A longer record of stable operation is established with an average ADSCR sustained above 1.4x in Fitch's rating case, provided the revenue risk assessment remains 'Stronger'

- We do not anticipate a rating upgrade until the 10-year projected average ADSCR is above 1.4x in Fitch's rating case and the revenue risk assessment remains 'Stronger'.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

- Projected average ADSCR drops below 1.3x in Fitch's rating case for a sustained period;

- A downgrade of the rating of PLN, the counterparty to the PPA, to below 'BBB-' or a revision of the revenue risk assessment for LBE to 'Midrange' due to cash flow instability.

BEST/WORST CASE RATING SCENARIO

International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit [https://www.fitchratings.com/site/re/10111579].

CREDIT UPDATE

LBE's achieved average availability factor of 85% in the nine months to September 2020, higher than the PPA projected availability of 80%. PLN's has been paying in a timely manner and there has been no impact on collection and operations from the pandemic. The plant experienced nine-day forced outage over the end of 2Q20 and the beginning of 3Q20, which resulted in low availability and it failed to meet the agreed availability in the respective periods. This failure resulted in additional costs of about USD5.5 million, including a penalty paid to PLN, back-feed power costs, costs for fuel oil for startup and repair materials and services.

The forced outage was due to boiler tube leaks, which were detected at the final superheater tube panel area. The unit was subsequently shut down and the cause investigated. According to the company, to ensure the chances of boiler tube failures are minimised, all the relevant tubes were thoroughly scanned and checked where necessary, and local contractors were closely supervised. After the unit was started on 16 July, it has been able to operate smoothly within all normal operating parameters. In addition, in order to prevent the same incident from occurring in the future, PTLBE plans to upgrade the boiler tubes at superheater panels with higher-grade materials, which will be carried out in stages during the scheduled outages from 2021 to 2023.

The actual heat rate for the plant so far this year worsened as a result of the forced outage to around 7%-7.5% above the PPA targets, compared with last year's 5% and underperformed Fitch's base case of 4% and rating case of 5.5%. In addition, the envisaged improvement works, including constructing a coal dome and some works on steam turbine and boilers, were delayed by the pandemic which has contributed to the worsening heat rate this year. According to management, the coal dome will be completed in March to April 2021. In addition, the improvement works on the steam turbine and boilers will be also implemented in the upcoming planned minor outage in December. Therefore, management is confident that the heat rate will return to normal from 2021. As such, Fitch maintained its previous heat rate assumptions under its revised base case and rating case while incorporating additional capital expenditure needed for the improvement works.

During January to September 2020, LBE continued to remain in the top rank on the merit order of PLN's Java-Bali grid, demonstrating its cost competitiveness and importance to the grid.

FINANCIAL ANALYSIS

Given the fully amortising nature of the debt and definite term of the PPA, which terminates in 2042, Fitch's metric analysis focuses on the average and minimum ADSCR. Fitch's base-case DSCR profile averages 1.49x (last year's base case: 1.49x), with a minimum of 1.18x (previously 1.16x). Fitch's rating-case ADSCR averages 1.42x (previously 1.43x), with a minimum of 1.08x (previously 1.05x). The 10-year ADSCR in Fitch's rating case averaged 1.33x (previously 1.36x).

The minimum ADSCR reflects the impact of planned outages, coupled with lower cash flow generation, in certain years. The company says it is closely working with PLN and actively managing the outage schedule on a yearly basis, giving the company the ability to optimise the timing of outage and minimise the seasonality as needed.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG CONSIDERATIONS

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg