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JAKARTA (Rambuenergy.com) – Moody’s Investors Service has assigned a definitive Ba3 rating to Star Energy Geothermal (Wayang Windu) Limited’s US$580 million 6.75% senior secured notes due 2033.
The rating outlook is stable, the rating agency said.
The stable rating outlook reflects Moody’s expectation that Star Energy’s performance is unlikely to experience a material change over the next 12-18 months relative to Moody’s base case expectations.
“The Ba3 rating reflects Star Energy’s predictable revenue profile, underpinned by a solid operating track record and the strong take-or-pay features of its energy sales contract with PT Perusahaan Listrik Negara (PLN, Baa2 stable), its sole customer,” says Spencer Ng, a Moody’s Vice President and Senior Analyst.
At the same time, Star Energy’s credit profile is constrained by its dependence on a continuous supply of steam resources and by its high financial leverage.
The Ba3 rating reflects Moody’s expectation of a strong operational performance during the term of the notes, supported by Star Energy’s experienced work force and robust track record since the start of operations, with the exception of a 4-month delay in 2015 caused by a landslide.
Star Energy’s credit profile also benefits from the robust tariff structure under its contract with PLN, according to which PLN is required to pay for at least 95% of the nameplate generation capacity available, regardless of whether PLN actually dispatches the electricity.
The rating incorporates the possible need for Star Energy to renew the supply arrangement with PLN for Unit 1 — one of two units — in December 2030.
At the same time, the company faces a degree of resource risk because steam production from geothermal wells will naturally decline over time, resulting in a need to periodically drill new make-up wells and to undertake well-maintenance measures to maintain steam supply.
Notwithstanding Star Energy’s sizable capital spending program over the term of the notes and its extensive experience in the Wayang Windu area, the company is exposed to residual resource risk given the potential variability over how quickly production from existing wells will decline and how much steam can be gained from the make-up well drilling.
Star Energy’s rating considers its high financial leverage and sizeable drilling program, which reduce its financial flexibility. Over the term of the notes, Moody’s expects Star Energy to achieve an average debt service coverage ratio (DSCR) of 1.28x under Moody’s base case assumptions.
“We consider the changes made to the bond as credit neutral,” Ng says, adding “The reduced issuance size and tightening of metric-based thresholds for equity distribution is outweighed by the negative impact arising from an increased coupon rate and slight delay in the funding of its debt service reserve and major maintenance reserve.”
Moody’s expects the shortfall in the company’s reserve accounts to be temporary, with restrictions on equity distributions being in place until all reserve accounts are fully funded, expected to be around June-2018.
Nevertheless, Star Energy’s liquidity position will be weak in the meantime, absent any management countermeasures, Moody’s said.
Cash reserving requirements under the notes will lessen the impact from an increase in capital spending requirements, but Star Energy’s capacity to manage an unexpected shift in the timings of the drilling program — in response to actual well performance — will remain constrained.
The Ba3 rating has not factored in the potential credit impact of an expansion at Unit 3, given uncertainty over its timing and funding structure. Moody’s will consider the financial impact and execution risk relating to such an expansion when Star Energy proceeds with its expansion plans.
Upward momentum for the rating is not expected in the near term, given the project’s fixed revenue profile. Over time, the rating could face upward rating pressure if there is a sustained improvement in the company’s DSCR levels to above 1.35x.
On the other hand, the rating could come under downward pressure if the projected financial metrics drop to levels below Moody’s base case expectations.
Star Energy Geothermal (Wayang Windu) Ltd operates one of the largest geothermal power stations in Indonesia by capacity. Its plant on Java Island has an operational capacity of 227MW. Commercial operations for the 110MW Unit 1 began in June 2000, followed by the 117MW Unit 2 in March 2009. All of the electricity produced is sold to PLN under an energy sales contract.
Star Energy Geothermal (Wayang Windu) Limited is 100% owned by Star Energy Geothermal Pte Ltd (SEG), which is in turn 60% owned by Star Energy Group Holdings Pte Ltd (SEGH).
SEGH and SEG own a further 648MW of geothermal generation capacity in West Java (Darajat and Salak) after acquiring these facilities from Chevron Corporation (Aa2 stable) in March 2017. (*)
Moody’s has occasionally faced litigation from entities whose bonds it has rated on an unsolicited basis, and investigations concerning such unsolicited ratings. In October 1995, the school district of Jefferson County, Colorado sued Moody’s, claiming the unsolicited assignment of a “negative outlook” to a 1993 bond issue was based on Jefferson County having selected S P and Fitch to do its rating. Moody’s rating raised the issuing cost to Jefferson County by $769,000.