Moody's affirms LLPL Capital's Baa3 rating; outlook remains stable

(Singapore, February 21, 2023) -- Moody's Investors Service has today affirmed the Baa3 rating on the backed senior secured USD notes of LLPL Capital Pte. Ltd. (CPL) due in February 2039.

The rating outlook remains stable.

RATINGS RATIONALE

"The affirmation reflects our expectation that annual debt service coverage ratio (DSCR) of PT Lestari Banten Energi (Banten 1) will return to the range of 1.3x and above after the completion of Banten 1's boiler tube upgrade program in 2024. The boiler tube upgrade program, which spans from 2021 to 2024, is expected to enhance Banten 1's operational performance from 2025 onwards," says Erman Zhang, a Moody's Analyst.

At the same time, Banten 1's credit quality will continue to be underpinned by the cash flow predictability derived from the project's long-term power purchase agreement (PPA) and a strong dispatch in Indonesia's Java-Bali grid.  Banten 1's PPA has a robust tariff structure that enables recovery of capital costs and pass-through of foreign exchange and coal costs, which provides a good degree of resilience to downside risks over the project's operational life. Banten 1 is cost competitive among its peers and has ranked relatively well in the merit order for dispatch in the Java-Bali grid over the past years. Moody's expects Banten 1's dispatch to remain strong over the next few years, in tandem with Indonesia's economic growth which will drive the increasing demand for electricity.

However, Banten 1's credit profile is constrained by its relatively short operational track record, which has been affected by several forced outage incidents that reduced plant availability in certain years. Most of these unplanned outages have been found to be associated with boiler tube failures. As a result, Banten 1 has rolled out a four-year boiler tube upgrade program starting from 2021, with the expectation that the newly replaced boiler tubes will improve the plant's operational performance and result in more consistent performance for the life of the PPA.

In addition, Banten 1 incurred higher-than-expected operating expenses (opex) and capital expenditures (capex) in the past three years, partially due to the aforementioned outage incidents. These higher costs have weighed on Banten 1's financial performance and translated to deterioration of annual DSCRs. The ongoing  boiler tube upgrade program and a major overhaul scheduled in 2023-2024 will further increase opex and capex. As a result, Moody's expects annual DSCR will continue to stay at depressed levels and improve to original expectations after completion of the boiler tube upgrade program in 2024.

Although the average annual DSCR will drop below 1.25x temporarily during 2022-2024, Moody's expects the average DSCR to return to the range of 1.34x and above after 2024, which is commensurate with Baa3 rating level. Moody's expects that Banten 1 will achieve an average DSCR of between 1.34x and 1.45x during the remaining tenor of the bond.

Moody's expects Banten 1's two sponsors, Genting Berhad (GENB, Baa2 stable) and SDIC Power Holdings Co., Ltd (SDIC Power), to continue their commitment and support to the project.  GENB and SDIC Power are established power plant operators with a solid track record in coal-fired power plant operation.

The stable rating outlook reflects Moody's expectation that Banten 1's equipment upgrade program will be completed on time and within budget and result in a material improvement in performance which will be commensurate with its investment grade credit quality.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING

Upward momentum for the rating is unlikely due to Banten 1's projected DSCRs and dividend policy, which comprises 100% of distributable cash flow.

The rating could come under downward pressure if (1) Banten 1's financial metrics drop to levels below Moody's base case expectations, including its average DSCR falling consistently below 1.3x during the amortization period; (2) due potentially to continued weaker operational performance after the boiler tube upgrade program, we expect annual DSCRs to drop below 1.3x for more than one year; or (3) there is a material shareholder change and/or a reduced willingness and/or ability of its shareholders to provide support, potentially driven by materially weaker credit quality.

The principal methodology used in this rating was Power Generation Projects Methodology published in January 2022 and available at https://ratings.moodys.com/api/rmc-documents/361400. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.

PT Lestari Banten Energi (Banten 1) is a 660 megawatt (MW) supercritical coal-fired power plant located on the Java-Bali grid in Indonesia. Banten 1 commenced operations in March 2017 and has a long-term power purchase agreement (PPA) to sell electricity to PLN (Persero) (P.T.) (PLN, Baa2 stable). The PPA was signed in July 2012 and will end on 27 March 2042.

Banten 1 is owned by Lestari Listrik Pte. Ltd. (LLPL, 95%) and PT Hero Inti Pratama (5%). LLPL is indirectly owned by Genting Berhad (GENB, 57.89%) and SDIC Power Holdings Co., Ltd (SDIC Power, 42.11%). GENB and SDIC Power's effective shareholdings in Banten 1 are therefore 55% and 40%. LLPL Capital Pte. Ltd. (CPL) is the issuer of the proposed USD notes. CPL is owned by the same shareholders as LLPL, with the same proportional shareholding.

On 4 February 2019, CPL completed its issuance of USD775 million worth of backed senior secured USD notes. The USD notes are unconditionally and irrevocably guaranteed by Banten 1. (ends)