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

(Fitch Ratings - Hong Kong - 30 Nov 2021)-- 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 affirmation reflects the credit profile of the notes underpinned by the predictable revenue stream under LBE's 25-year power-purchase agreement (PPA) with PT Perusahaan Listrik Negara (Persero) (PLN; BBB/Stable) expiring in 2042, pass-through mechanism of fuel costs to PLN, the use of commercially proven technology and an in-house veteran management team.

LBE's financial profile under the Fitch rating case demonstrates an average debt-service coverage ratio (DSCR) of 1.37x (2020 review: 1.34x), with a minimum DSCR of 1.17x (2020 review: 1.17x). The achieved DSCR 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

Robust Long-Term PPA: Revenue Risk - Stronger

LBE's take-or-pay PPA with PLN, Indonesia's state-owned utility, insulates its revenue stream from electricity demand volatility and merchant risk. The PPA consists of capacity payments based on the availability of the power plant to cover debt service, fixed operation and maintenance (O&M) costs, Indonesian taxes, return on equity as well as energy payments to cover variable costs, such as coal and variable O&M costs. The design of PPA means cash flow is largely independent of dispatch levels until 2042, when the contract expires, beyond the term of the debt.

Termination provisions are another strong feature of the PPA. These provide for a buy-out price that is sufficient adequate to cover the repayment of the outstanding notes under non-remediable events at PLN, government action or inaction and PLN's exercise of a purchase option. These attributes lead to a 'Stronger' revenue assessment.

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

LBE employs conventional commercially proven technology and benefits from a well-budgeted O&M plan, which is validated by an independent engineer and carried out by an experienced in-house team. The plant is further protected by a six-year extendable service agreement with its engineering, procurement and construction contractor, Harbin Electric International Co. Ltd.

LBE has outperformed its contractual availability target, but has slightly underachieved agreed heat rates during its shorter operating history since 2017. However, Fitch believes the PPA heat rates were aggressive in order to enhance the plant's cost competitiveness, as evidenced by the plant's high rank on the merit order of PLN's Java-Bali grid.

Our overall assessment of operation risk is constrained at 'Midrange' due to the plant's lack of a proven operational record and the cost-plus O&M arrangement, with cost risks residing with the plant.

Coal Cost Pass-Through: Supply Risk - Midrange

LBE has coal-supply agreements with two primary suppliers, PT Kideco Jaya Agung (KJA) and PT Antang Gunung Meratus (AGM). These are reputable coal producers in Indonesia. Coal supply is secured until 2031. This is 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 domestic thermal coal in Indonesia (known as HBA), adjusted for coal specifications as received. The coal-pricing mechanism mirrors the PPA provisions, which are designed to pass through 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 fixed interest-rate notes are fully amortising, with typical project finance structural projections. These include a six-month debt service reserve, a major maintenance reserve, secured accounts and a standard cash flow waterfall in addition to an adequate security package for noteholders. The notes further benefit from a distribution lockup covenant of 1.2x DSCR, though it is only backward looking; a 'Midrange' feature.

PEER GROUP

LBE compares well to PT Paiton Energy (Paiton), which guarantees the notes issued by Minejesa Capital BV (senior secured note rating: BBB-/Stable). Paiton, located in eastern Java, is Indonesia's second-largest independent power producerin Indonesia, with net installed capacity of 2,045MW for its three-unit power complex; one of Paiton's three units uses supercritical pulverised coal technology.

Both projects benefit from long-term PPAs with fuel-cost effectively passed through to the off-taker, PLN, and are run by experienced operation teams. Paiton has a longer proven operating record and greater economies of scale through its three units, while LBE is more susceptible to a loss of availability due to its single-unit configuration, which does not provide for redundancy. Nevertheless, LBE performs better in foreign-exchange risk mitigation, as it is not exposed to currency mismatch between revenue and debt service, while there is a minor currency mismatch at Paiton.

RATING SENSITIVITIES

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

Projected average annual DSCR drops below 1.3x in Fitch's rating case on a sustained basis.

A downgrade of PLN, the counterparty to the PPA, to below 'BBB-'.

A revision of our revenue risk assessment for LBE to 'Midrange' due to cash flow instability.

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

A longer record of stable operation, with the average annual DSCR staying above 1.4x in Fitch's rating case on a sustained basis, provided our revenue risk assessment remains at 'Stronger'

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

The plant has operated well from 4Q20 to 3Q21, with satisfactory availability except during December 2020-February 2021 when a scheduled minor outage was carried out. Plant availability was further affected by a unit load derating due to a hot air leak. Actual physical availability was 83% in 9M21, beating PPA projected availability of 80%.

The actual heat rate for coal in 9M21 was around 5%-7% above PPA targets. Heat rate underperformance was caused by improvement works that had been delayed by the Covid-19 pandemic, including the construction of a coal dome and work on the steam turbine and boilers. The coal dome will take around 60 days of work, but continues to be delayed as the contractor in China is unable to send workers to Indonesia to do the work. The company expects the coal dome to be completed by 2022.

The plant was dispatched at a higher level than Fitch expected during the 12 months ending September 2021 amid rising grid demand, as some coal-fired plants were in outage mode. This was despite the underperformance in 4Q20 due to the pandemic and early 1Q21's yearly scheduled outage period. There was exceptionally low demand in 4Q20, as many industries were not operating at maximum capacity, but LBE was still frequently requested to run at high loading throughout the period under PLN's merit order plan. This demonstrated the plant's cost competitiveness and importance to the grid.

Coal supply has been stable over the past year and we expect coal consumption to remain high, as LBE is on PLN's high dispatch merit order list due to its reliability and economical dispatch mode. Since beginning of 2021 PLN has been requesting high loads from LBE to meet rising grid demand and additional coal is required for LBE to run at a high load factor.

FINANCIAL ANALYSIS

Fitch's metric analysis focuses on the average and minimum DSCR, given the fully amortising nature of the debt and definite term of the PPA till 2042. Fitch's base-case profile annual average DSCR averaged at 1.42x (in 2020 review: 1.39x), with a minimum of 1.21x (in 2020 review: 1.18x). Fitch's rating-case profile annual average DSCR averaged at 1.37x (in 2020 review: 1.34x), with a minimum of 1.17x (in 2020 review: 1.17x). The minimum DSCR 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 managing the outage schedule on a yearly basis, allowing it to optimise outage timing and minimise 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. (ends)