Delay of operation start at Wayang Windu not effecting rating of Star Energy

Wayang Windu Unit II, West Java, Indonesia (source: Aecom)
Alexander Richter 5 Jun 2015

Following the delay of operation of its Wayang Windu geothermal operations, Star Energy has not been effected in its ratings with Fitch Ratings.

Fitch Ratings says that the ratings of Star Energy Geothermal (SEG) (Wayang Windu) Ltd are not immediately affected by SEG’s announcement that it would restart its operations in October 2015 instead of an initial estimate of early June 2015. The company’s operations have been halted since a landslide damaged one of its steam pipelines on 5 May 2015.

SEG said that the delay was due to an underestimation of the damage, and the company would now be required to purchase additional material to rectify the damage, which could take up to four months to be delivered. SEG previously expected to be able to repair the damage with the existing inventory of pipes.

As a result of the delay, Fitch now expects SEG’s EBITDA to reduce to about USD30m in 2015 (USD87m in 2014) and its FFO net leverage in 2015 to exceed 10.0x, higher than the 5x level at which negative rating action could be considered. Fitch does not include the expected proceeds from its business interruption insurance in the computation of its EBITDA or FFO.

SEG’s ratings are, however, not impacted due to the one-off nature of the incident. SEG expects operations to resume at about 80% capacity by October and fully normalise by December 2015. SEG’s power plants were unaffected. Fitch expects SEG to generate EBITDA of about USD80m-85m a year after 2015, and its leverage to improve to below 5x in 2016. SEG also does not have any immediate refinancing requirements; with its bond maturities commencing only in 2017.

SEG’s liquidity is robust enough to support the loss of cash generation during the outage; the company had unrestricted cash balances of USD75m as at December 2014. In addition to this, SEG said that its insurance would cover the costs of repairs to the pipeline and cover operating and financing costs up to USD75m over two years, provided operations are interrupted for more than 45 days.

While the ratings of the company are, not impacted, the landslide incident highlights the risks associated with its single-site operations, which together with its small scale, constrains its ratings.

Source: Press Rlease by Fitch Ratings