TEXT-Fitch affirms Star Energy Geothermal (Wayang Windu) at 'B+'

Jan 30 - Fitch Ratings has affirmed Star Energy Geothermal (Wayang Windu) Limited's (SEG) Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'B+'. The Outlook is Stable. At the same time, the agency has affirmed SEG's USD350m senior secured notes due in 2015 at 'B+' with a recovery rating of 'RR4'.

"The ratings reflect the high visibility of SEG's earnings arising from both its reliable operating performance and a long-term 'take or pay' energy sales contract," says Shahim Zubair, Associate Director with Fitch's Asia-Pacific Energy and Utilities team. SEG has operated at an average capacity factor of above 97% since commencement of operations in 2000, which compares quite favorably with the global geothermal power industry average. Its energy sales are based on a long term contract with the state power utility, PT Perusahaan Listrik Negara (PLN; 'BBB-' /Stable), which provides for tariff adjustments for movements in exchange rates and inflation.

Fitch notes that SEG is exposed to geological risks inherent to operating in an active seismic area, and its single site operation further augments this risk. Fitch however notes that this risk is mitigated to some extent as SEG's insurance policies cover most plant costs, as well as 24 months of business interruption.

SEG has scaled down its capex for Unit 3. As per the revised plan, Unit 3 will now consist of 60MW of generation capacity (127MW originally) and is estimated to cost around USD190m (USD90m lower than the original capex budget). Fitch however notes that an EPC contract for the construction of Unit 3 is still not in place, and the company is still in the process of verifying sufficient thermal resources to support Unit 3's additional capacity. The company expects to award the EPC contract, following verification of sufficient thermal resources, by end-2012. Although SEG's investment per unit of incremental generation capacity is higher as per the revised plan for Unit 3, this does not negatively affect its financial leverage on a net of cash basis.

SEG's leverage as measured by adjusted debt net of cash to operating EBITDAR (where debt excludes the USD102m of subordinated, interest free shareholder loan) improved to 2.6x in both the nine-month period to September 2011 (9M11) and in 2010, from 3.9x in 2009. Its interest coverage, measured by fund flow from operations to interest, was robust at 2.3x in 9M11.

Fitch notes that SEG's liquidity position is healthy with no material debt maturities until the USD notes mature in 2015. The covenants of the USD notes restrict dividend payments and repayment of the shareholder loan until the USD notes are repaid. Cash flows from operations of around USD40m per year further underscores SEG's liquidity. The company has not faced any material payments delays from PLN, the sole off-taker of electricity generated by SEG since 2004. The revised Unit 3 capex can be comfortably covered by cash on hand and internal cash generation.

Fitch expects SEG to maintain its financial leverage between 2.5x-3.0x over 2012-2014, while it undertakes capex for Unit 3. A negative rating action may occur if the construction of Unit 3 encounters substantial cost overruns and/or if SEG's leverage exceeds 3.75x and funds from operations interest coverage falls below 2.0x, both on a sustained basis. A positive rating action may be taken if SEG demonstrates that it can execute capex for Unit 3 without incurring significant costs or time blow-outs, and if it can maintain its financial leverage below 3.0x on a projected basis.