(Singapore, September 29, 2020)--Moody's Investors Service has assigned a (P)Baa3 ratings to the proposed senior secured USD bond to be co-issued by Star Energy Geothermal Darajat II Limited and Star Energy Geothermal Salak, Ltd, which are both wholly-owned subsidiaries of Star Energy Geothermal (Salak-Darajat) B.V. (SEGSD).
The proposed bond will comprise of two fully amortizing tranches, a 9 year tranche due 2029 and an 18 year tranche due 2038.
The outlook on the rating is stable.
SEGSD and its restricted subsidiaries hold the exclusive rights to explore, develop and utilize geothermal energy in the Darajat and Salak contract areas in Java, Indonesia, under joint operations contracts (JOCs) executed with PT Pertamina Geothermal Energy (PGE), a subsidiary of Pertamina (Persero) (P.T.) (Baa2 stable).
The two projects at Salak and Darajat have combined generation capacity of 647.8MW, of which 412.8MW are operated by SEGSD. The remaining facilities are operated by Perusahaan Listrik Negara (P.T.) (PLN, Baa2 stable), using steam supplied by SEGSD.
The proposed bond will be guaranteed by (1) each of the co-issuers, (2) SEGSD, and (3) two subsidiary guarantors, namely Star Energy Geothermal Darajat I Limited and Star Energy Geothermal Salak Pratama, Ltd.
The debt servicing obligations under the proposed bond will be supported by a restricted group (RG) that includes the guarantors and PT Darajat Geothermal Indonesia (DGI), a security provider and restricted subsidiary of SEGSD.
SEGSD will use the net proceeds from the transaction to repay existing senior debt facilities and associated repayment expenses, funding of reserves and general corporate purpose relating to the geothermal operations.
The provisional status of the rating will be subject to Moody's review of the final transaction documents.
RATINGS RATIONALE
"The (P)Baa3 ratings of the proposed bond incorporate (1) SEGSD's predictable revenue profile, which is underpinned by its availability based revenue under long-term energy sales contracts (ESCs) with PLN, (2) its extensive operating track record, (3) its moderate financial profile, and (4) its exposure to resource renewal risk," says Spencer Ng, a Moody's Vice President and Senior Analyst.
Under the ESCs, SEGSD will sell steam produced at the geothermal fields and electricity generated from its units to PLN at agreed tariffs. PLN is obliged to pay for capacity and steam supply available at SEGSD's facilities -- up to the agreed take-or-pay level -- even if the electricity has not been dispatched or the steam has not been utilized by PLN.
"The supportive take-or-pay arrangement, and the projects' competitive tariffs have helped SEGSD maintain stable operating cash flow and electricity dispatch volumes during the first half of 2020, notwithstanding the sharp decline in power demand in Indonesia," adds Ng.
Moody's expects SEGSD to maintain its solid operational performance during the bond tenor, supported by its experienced workforce. Over the past five years, SEGSD's units have achieved average availability above the take-or-pay levels on a consistent basis. In contrast, the availability of PLN-operated units was affected by outages in 2018, the recurrence of which could lead to volatility in the RG's steam revenue.
SEGSD faces resource renewal risk, stemming from the need to drill make-up wells and undertake well intervention measures to replenish steam production lost due to natural depletion, the cost of which represents a significant capital outlay for the group.
Moreover, due to uncertainties over well depletion rates and the incremental steam the group can gain through the planned welling drilling campaigns, SEGSD might need to increase the frequency or scale of its drilling program to meet its steam requirements. Such situation would reduce the cash flow available for debt servicing.
However, Moody's believes that such exposure is manageable due to SEGSD's extensive experience and the quality and maturity of these geothermal fields, which will support SEGSD's ability to design and implement its scheduled drilling program over time. Moreover, the RG's exclusive right to operate in the contract areas also lower the risk of over-exploitation of the steam reservoirs.
Over the term of the bond, Moody's expects the RG to achieve an average Debt Service Coverage Ratio (DSCR) of around 1.7 times which compares favorably with similarly rated peers and is a key supporting factor to its ability to manage unexpected challenges from its operations. Given the recent volatility in capital markets, there is an element of uncertainty over the bond's final coupon which, in turn, could affect SEGSD's projected financial profile and exert downward pressure on the bond ratings.
Moody's considers the proposed security package to be weaker when compared with other similarly-rated projects across Moody's global portfolio, considering that ESCs and JOCs will not be assigned. Nonetheless, the proposed security package -- which includes pledge of shares of the RG entities and charge over the project's on-shore and off-shore accounts -- is broadly comparable with similarly rated precedents in Indonesia such as Minejesa Capital BV (Baa3 stable).
In terms of environmental, social, and governance (ESG) factors, the RG's exposure to governance considerations stems from the potential influence of its ultimate parent, Barito Pacific Tbk (P.T.) (B1 stable), over its operations. Moody's believes such exposure as manageable, given the effectiveness of the ringfencing arrangement under the proposed bond documents and the presence of minority shareholders, which help insulate the RG's credit profile from that of its shareholders.
SEGSD benefits from positive macroeconomic and sectoral trends in renewable energy and thus has low exposure to carbon transition risk. The group's geothermal business is aligned with Indonesia's target to reduce its carbon footprint and meet its nationally determined contributions.
The stable outlook reflects Moody's expectation that SEGSD will generate stable cash flows over the next 12-18 months, underpinned by predictable tariffs under long-term ESCs and a continuation of solid operating performance.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Upward rating movement is unlikely in the near term, given the project's fixed revenue profile. But over time, Moody's could upgrade the rating if there is a sustained improvement in the company's DSCR levels to above 2.2x.
On the other hand, downward rating pressure could build if the projected financial metrics drop to levels that are below Moody's base case scenario, including average DSCR falling consistently below 1.65x during the amortization period. This could result from a faster-than-expected decline in steam production which could lead to increases in drilling costs. The ratings could also be pressured if there is a material deterioration in the ratings of Barito Pacific, and if such deterioration negatively impacts on SEGSD's business and financial profile.
The principal methodology used in these ratings was Power Generation Projects Methodology published in July 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1236893. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
SEGSD and its subsidiaries hold the exclusive rights to explore, develop and utilize geothermal energy in the Darajat and Salak contract areas in Java, Indonesia, under joint operations contracts executed with PT Pertamina Geothermal Energy (PGE), a subsidiary of PT Pertamina (Persero) (Baa2 stable). Steam and electricity derived from the fields and generation facilities are sold to Perusahaan Listrik Negara (P.T.) (PLN, Baa2 stable) under energy sales contracts.
SEGSD is part of the Star Energy Group Holdings Pte Ltd, which owns another 227-megawatt (MW) geothermal power station, Star Energy Geothermal (Wayang Windu) Limited (Ba3 stable), in Wayang Windu, Indonesia. Star Energy Group Holdings, in turn, is majority owned by Barito Pacific Tbk (P.T.) (B1 stable).
