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

(Fitch Ratings - Hong Kong/Jakarta - 28 Nov 2022)-- Fitch Ratings has affirmed the 'BBB-' rating on the USD775 million of 6.875% notes due 2039 guaranteed by Indonesia-based PT Lestari Banten Energi (LBE). The Outlook is Stable. The notes are issued by LLPL Capital Pte. Ltd., a Singapore-domiciled SPV 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 high visibility of revenue stream under LBE's 25-year power purchase agreement (PPA) with PT Perusahaan Listrik Negara (Persero) (PLN, BBB/Stable) expiring in 2042, effective pass-through mechanism of fuel costs to PLN, the use of commercially proven technology and an in-house experienced management team.

Under Fitch's rating case conditions, LBE's profile debt-service coverage ratio (DSCR) averages 1.35x (previously 1.37x) with minimum DSCR of 1.21x. The achieved DSCR is commensurate with the 1.3x 'BBB-' rating threshold applicable for projects that have a 'Stronger' revenue risk attribute, in line with Fitch's Thermal Power Project Rating Criteria.

KEY RATING DRIVERS

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

LBE benefits from conventional, commercially proven technology and a well-budgeted operating and maintenance (O&M) plan managed by an experienced in-house team and validated by the independent engineer (IE). The plant is further protected by an extendable six-year service agreement with engineering, procurement and construction contractor Harbin Electric International Co. Ltd. LBE has beaten the contractual availability target since 2017 while slightly underachieving the agreed heat rates.

However, the PPA heat rates were aggressively determined due partly to the sponsors' commercial strategy to enhance the plant's cost competitiveness, which has been demonstrated by the plant's high rank on the merit order of PLN's Java-Bali grid. The overall assessment of operation risk is constrained at 'Midrange' due to cost-plus O&M arrangements, with the cost risks residing with the plant and therefore considered as a weaker attribute.

Effective Coal Cost Pass-Through Mechanism: Supply Risk - Midrange

LBE has coal-supply agreements with two reputable primary suppliers, PT Kideco Jaya Agung and PT Antang Gunung Meratus, in Indonesia. Coal supply is secured until 2031. This is shorter than the notes' tenor, but abundant domestic coal production and reputable suppliers mitigate the remaining exposure.

Prices are linked to the Indonesian benchmark thermal coal price, known as HBA, and adjusted for coal specifications as received. The coal-pricing mechanism mirrors the PPA provisions. These 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.

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 O&M costs, Indonesian taxes and return on equity as well as energy payments to cover variable costs, such as coal and variable O&M costs. The PPA design means cash flow is largely independent of dispatch levels until 2042, when the contract expires -beyond the debt tenor.

Termination provisions are another strong feature of the PPA. These provide for a buy-out price that is sufficient 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.

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, although it is only backward looking; a 'Midrange' feature.

PEER GROUP

LBE compares well to PT Paiton Energy, which guarantees notes issued by Minejesa Capital BV that are rated 'BBB-'/Stable. Paiton, located in eastern Java, is the second-largest independent power producer 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 benefit from long-term PPAs with fuel cost effectively passed through to the off-taker, PLN, and are run by experienced operation teams. Even so, Paiton has a longer operating record and economies of scale through its three units, while 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.

Nevertheless, LBE performs better in foreign-exchange risk mitigation because it is not exposed to a currency mismatch between revenue and debt service. Paiton has a minor currency mismatch, which is considered a weaker attribute.

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 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.

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

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

In the trailing 12 months ended 3Q22, the plant exported a total of 4,147,629MWh, higher than expected in Fitch's rating case, benefiting from increasing demand on grid, coupled with the consecutive top-five merit order ranking.

The AFa (actual availability factor) averaged 79.13% in 9M2022, while largely held back by the planned outage in January and extended outage in February 2022. The extension was caused by boiler tube leakage and a steam turbine generator excitation disturbance. The unit resumed normal operations after the fault was rectified, and the availability rebounded quickly and then stayed well above 95%.

The actual heat rate for coal from 4Q21 to 3Q22 was around 5.6% above the PPA targets, close to estimates under Fitch's rating case. Heat rate underperformance was due to a delay in upgrading works on a coal dome, steam turbine and boilers amid the Covid-19 pandemic. The heat rate has underperformed in the past few years but Fitch notes that the company expects the heat rate could see significant improvement after major maintenance work scheduled for the end of 2023.

Moreover, except for the coal secured from coal suppliers under the coal supply agreement, spot coal from the local market with price premium was sought to meet high grid demand in 4Q21. The higher-than-HPB (Indonesian coal price reference) portion was unable to be passed through to PLN, resulting in about a USD5 million financial impact to LBE.

In 2021, total capex incurred was around USD4.2million, mainly on improvement works on a generator, steam turbine, HP heaters, boiler tubes, boiler feed pump and coal conveyors to improve reliability and operational efficiency. The additional capex exceeding the budget was due largely to the combination of inflation, a fluctuating foreign-exchange rate and service cost increases during the pandemic.

The cash flow in 2021 was healthy and adequate to service debt and all covenants, with the annual DSCR at 1.28x and no breaches observed.

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 until 2042. Fitch's base-case profile annual average DSCR averaged 1.41x (in 2021 review: 1.42x), with a minimum of 1.25x. Fitch's rating-case profile annual average DSCR averaged 1.35x (in 2020 review: 1.37x), with a minimum of 1.21x. 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)