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

(Fitch Ratings - Hong Kong/Jakarta - 09 Nov 2023)--Fitch Ratings has affirmed the 'BBB-' rating on the USD775 million of 6.875% notes due 2039 that are 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 notes' credit profile, which is underpinned by the predictable revenue stream from LBE's 25-year power-purchase agreement (PPA) with PT Perusahaan Listrik Negara (Persero) (PLN, BBB/Stable), which expires in 2042. The credit profile is further supported by a pass-through mechanism of fuel costs to PLN with a performance requirement, the use of commercially proven technology and LBE's in-house veteran management team.

LBE's financial profile under the Fitch rating case demonstrates a debt-service coverage ratio (DSCR) of 1.36x (previously 1.35x), with a minimum DSCR of 1.18x (previously 1.21x). The DSCR is commensurate with the 1.3x 'BBB-' rating threshold that applies to projects with a 'Stronger' revenue risk attribute, in accordance with Fitch's Thermal Power Project Rating Criteria.

KEY RATING DRIVERS

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

The cost-plus operation and maintenance (O&M) arrangement places cost volatility risks with the plant. However, LBE employs conventional commercially proven technology and benefits from a well-budgeted O&M plan, 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, which expires after the completion of the first major overhaul in February 2024. LBE says that the terms and tenor of this extension are under negotiation and likely to be finalised well ahead of expiry. However, the new terms are unlikely to change the overall operation risk assessment.

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

Coal Cost Pass-Through: Supply Risk - Midrange

LBE has coal-supply agreements with two main suppliers, PT Kideco Jaya Agung and PT Antang Gunung Meratus, which are reputable Indonesian coal producers. Coal supply is secured until 2031, prior to note maturity, but an abundance of reputable suppliers mitigates the remaining exposure. Prices are linked to the benchmark price of Indonesian thermal coal and adjusted for specifications as received. The coal-pricing mechanism mirrors the PPA provisions, which aim to pass through coal costs to PLN via energy payments, although the mechanism's effectiveness 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, return on equity as well as energy payments to cover variable costs, such as coal and variable O&M costs. The PPA results in cash flow being largely independent of dispatch levels until 2042, when the contract expires. This is 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 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, though it is only backward looking; a 'Midrange' feature.

PEER GROUP

LBE compares well to PT Paiton Energy, which guarantees the notes issued by Minejesa Capital BV (senior secured notes: BBB-/Stable). Paiton, located in eastern Java, is Indonesia's second-largest independent power producer, with net installed capacity of 2,045 megawatts 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 demonstrates better foreign-exchange risk mitigation, as it is not exposed to currency mismatch between revenue and debt service, while there is a minor mismatch at Paiton.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

Projected average annual DSCR dropping to below 1.3x under Fitch's rating case for a sustained period.

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

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

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

Projected average annual DSCR of above 1.4x under Fitch's rating case for a sustained period, provided the revenue risk assessment remains 'Stronger'

CREDIT UPDATE

The plant exported 4,327 gigawatt hours of energy from July 2022 to end-June 2023, with a high dispatch merit order on PLN's list due to its reliability and economical dispatch mode. This met Fitch's forecast.

Availability factors in most months were maintained at an acceptable level of above 99%, except in October 2022, December 2022 and January 2023. During these months, forced and planned outages saw availability factors fall to 46%, 44% and 68%, respectively. Nevertheless, the average actual availability factor still outperformed the average projected PPA availability.

The heat rate continued to underperform the PPA target, but improved from previous years, with a 4% variance from the PPA target in 1H23. This followed fewer condenser leakages, lower losses from main steam pressure and temperature and optimisation of boiler combustion. However, coal dome progress remains delayed as the contractor selection process has not been finalised.

Capex outflow amounted to USD7.9 million in 2022, mainly for maintenance, unscheduled outages, capitalised O&M costs and advance deposits for scheduled maintenance in 2023 and 2024. The next major scheduled maintenance will be carried out from December 2023 and will last for two months. Fitch estimates that the major scheduled maintenance and a one-off boiler tube upgrade programme will result in higher capex of USD9.3 million in 2023 and USD11.2 million in 2024.

The company reported a low historical DSCR of 1.03x in 2022 with no breaches observed under financing documents. This was due to a large decrease in payable accounts, with the coal supplier's timely billing leading to lower accounts payable turnover, as well as unscheduled outages in February and October 2022. However, Fitch believes these factors were one-offs and do not affect Fitch's forecasts.

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 DSCR. Fitch's base-case DSCR profile averages 1.41x (previously 1.41x), with a minimum of 1.22x (previously 1.25x). Fitch's rating-case DSCR profile averages 1.36x (previously 1.35x), with a minimum of 1.18x (previously 1.21x).

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

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/topics/esg/products#esg-relevance-scores. (ends)