Feb 1, 2011

Fitch affirms Star Energy at B+

Fitch Ratings has today affirmed Star Energy Geothermal (Wayang Windu) Limited's (SEG) long-term foreign currency issuer default rating (IDR) at B+. The outlook remains stable.
At the same time, in a press statement today, the agency has also affirmed the existing US$350 million senior secured notes due in 2015 at B+ with a recovery rating of RR4.
The affirmations reflect SEG's strong track record of reliable operating performance, its base-load generation status and the long-term take or pay energy sales contract which underpins the company's stable and predictable recurring cash flows.
At the same time, the ratings remain constrained by the following: the company's exposure to a single-site operation, the inherent risks of a geothermal operation in an active seismic area, and the concentration risk of a sole electricity off-taker, PT Perusahaan Listrik Negara (PLN).
Fitch continues to note that PLN has a weak financial profile resulting from its inability to sell electricity at an economical level.
However, considering PLN's strategic importance and strong linkages with the government, the agency believes the Indonesian government will continue to provide financial support to PLN in the event it is required.
The ratings are also constrained by the significant capex needs for the construction of the third unit (Unit 3) geothermal power plant with 127 megawatt (MW) capacity, which is estimated at around US$277 million of which nearly US$20 million had been spent by the end of 2010.
Fitch believes this project will delay SEG's ability to deleverage. The construction of Unit 3 was originally expected to be completed by mid-2013; however, this has been held up by issues over land permits which have taken longer than expected to resolve.
Unit 3 is now expected to commence operation around mid-2014. Fitch believes that the impact from the delays does not warrant an immediate negative rating action, which lends support to SEG's stable outlook.
A negative rating action may occur if the construction of Unit 3 encounters substantial delays or cost overruns resulting in the following: higher-than-expected net debt (excluding subordinated shareholder loans) to EBITDAR being sustained above 3.75x and funds from operations interest coverage being sustained below 2.0x.
Given that the rating constraints are not factors that can be addressed in the short tem, Fitch does not envisage a positive rating action in the medium term.
The agency has no immediate concern regarding SEG's liquidity as it has minimal debt maturing up until 2015. At end September 2010, SEG's cash reserve balance stood at US$102.9 million against total debt of US$367.7 million.
The total debt comprises US$350 million of senior notes maturing in 2015, with the balance coming from the existing interest rate swap derivative facility.
SEG is one of the largest geothermal electricity producers in Indonesia, with total installed capacity of 227 MW. It has exclusive rights to exploit and utilize geothermal resources at the Wayang Windu contract area located in the highlands of West Java. In the nine months ending September 2010, SEG's revenue and EBITDAR were US$85.8 million and US$68.7 million respectively.

Disclosure: No position at the stock mentioned above.  

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