Fitch Upgrades Geo Dipa to 'AA-(idn)'; Off RWP; Outlook Stable

(Fitch Ratings - Jakarta - 08 Dec 2021)--Fitch Ratings Indonesia has upgraded PT Geo Dipa Energi (Persero)'s National Long-Term Rating to 'AA-(idn)' from 'A(idn)'. The Outlook is Stable.

The upgrade reflects changes in Fitch's assessment of the linkages between Geo Dipa and the government of Indonesia (BBB/Stable), based on Fitch's Government-Related Entities (GRE) Rating Criteria. We now rate Geo Dipa using a top-down approach three notches below the sovereign.

The upgrade is driven by a revision of the assessment for the Support Track Record to 'Very Strong' from 'Moderate', and change in the assessment of the Financial Implications of Default to 'Strong' from 'Moderate'. These revisions are underpinned by government support by way of guarantee to Geo Dipa's new projects debts from Asian Development Bank (ADB, AAA/Stable). Geo Dipa has started drawing down loan facilities from ADB since September 2021 and we expect Geo Dipa's share of sovereign guaranteed debt to rise to around 85% by end-2022 from 44% currently as it progresses with capex.

In line with our GRE criteria, if such guarantees exceed 75% of a GRE's adjusted debt, this will lead to rating equalisation with the government provided there is no change in Geo Dipa's long-term shareholding. Indonesian government has been considering plans to consolidate all state-owned geothermal entities in the future though the plans remain uncertain. Fitch treats this as an event risk and will reassess Geo Dipa's rating in case of any likely change in shareholding.

Geo Dipa's Standalone Credit Profile (SCP) of 'a-(idn)' rating is underpinned by its long operational history with strong counterparties, stable margins and long-term revenue visibility. These are balanced against its small operational scale and our expectation of deterioration in its financial profile from a substantial expansion plan.

'AA' ratings denote expectations of very low default risk. They indicate very strong capacity for payment of financial commitments. This capacity is not significantly vulnerable to foreseeable events.

Key Rating Drivers

Government Guarantees: Indonesian government through PT Penjaminan Infrastruktur Indonesia (Persero) (BBB/Stable) and Indonesia's Ministry of Finance (MoF) has provided an unconditional and irrevocable guarantee to Geo Dipa's ADB loan facilities. These facilities comprise USD300 million from ADB and USD35 million from the ADB Clean Technology Fund (CTF) for the company's Patuha 2 and Dieng 2 projects to add 120MW of capacity.

'Very Strong' Support Record: Fitch has revised Geo Dipa's support record assessment to 'Very Strong' because of the government guarantee. These loans will account for more than 90% of Geo Dipa's total debt when fully drawn down based on the company's current plans. Government support to Geo Dipa has been consistent and in line with the former's commitment to increase the use of renewable energy and to fund 20%-30% of the latter's planned projects. Geo Dipa received equity injections from the government in 2015 and 2020 to develop renewable power plants.

'Strong' Financial Implications of Default: Fitch has revised the assessment of this rating factor to 'Strong' as we believe that a financial default by Geo Dipa would undermine investor confidence in the state's ability to support other GREs. A default by Geo Dipa will affect the ability of the sovereign and other GREs to raise funding, as the company's debt is guaranteed by the government. Our assessment of the rating factor is likely to improve once government guarantees cover more than 75% of Geo Dipa's adjusted debt.

'Strong' Ownership and Control: The Indonesian government ultimately owns 100% of Geo Dipa, mainly via the MoF. The government has strong influence over Geo Dipa's investment, strategy, and operational decisions. Geo Dipa is one of the special mission vehicles (SMV) of Indonesia with the mandate to fulfil the government's long-term target for renewable energy.The government is in the process of consolidating its geothermal assets in the future though the plans remain uncertain. Fitch treats this as an event risk and will reassess Geo Dipa's rating in case of any likely change in shareholding. The reorganisation may result in Geo Dipa's ratings being assessed under our Parent and Subsidiary Linkage Rating Criteria.

'Weak' Socio-Political Default Implications: We believe that a default by Geo Dipa will not materially disrupt Indonesia's power generation or even geothermal production due to its small scale. Geo Dipa has only 120MW of capacity with two operating plants.

Concentrated Operation; Long-Term Visibility: Geo Dipa has long-term revenue visibility supported by power-purchase agreements (PPAs) with state-owned PLN that extend over the next 20 years for its entire output. However, Geo Dipa's operations are highly concentrated with only two power plants. Nonetheless, this risk is partly alleviated by extensive insurance coverage, including for damage to property and business interruption loss.

Large Debt-Funded Expansion: Geo Dipa expects to double its capacity to 250MW by 2024 by adding a second unit each at its Dieng and Patuha plants. Fitch believes the execution risk for the expansion plan is manageable, as Geo Dipa has a long history of managing power plants, and most of the new capacity is at existing operating sites. However, Fitch expects this large debt-funded expansion plan go drive Geo Dipa's funds from operations (FFO) net leverage up to 7.0x in 2023 (2020: 0.4x). The metric will fall below the negative sensitivity of 5.5x from 2024, once the new capacity is fully operational.

Derivation Summary

Geo Dipa's rating can be compared with that of PT Pupuk Indonesia (Persero) (PTPI, AAA(idn)/Stable), which is equalised with the Indonesian sovereign rating. Both companies have 'Strong' Financial Implications of Default as their defaults would imply the state has reduced ability to support other GREs. Both companies also have 'Very Strong' Support Record assessments. Geo Dipa receives periodic financial equity to support its renewable projects and a substantial portion of its debt is guaranteed by the government. PTPI receives annual subsidies that are allocated in the state budget.

PTPI has 'Very Strong' Status, Ownership and Control as we expect the company to be remain fully owned by the government as it is the sole distributor in Indonesia of subsidised fertiliser. In comparison, the assessment of this factor for Geo Dipa's is 'Strong'. PTPI also has 'Very Strong' Socio-Political Implications of Default compared with Geo Dipa's 'Weak' assessment. The failure of PTPI will be detrimental to the distribution of subsidised fertiliser, which will affect the well-being of more than 20 million farming households and ultimately the country's food security.

The standalone credit assessment is well-positioned relative to national peer PT Aneka Gas Industri Tbk (A-(idn)/Positive). Both Geo Dipa and Aneka Gas have similar exposure to stable cash flows from long-term customer contracts. Aneka Gas is larger, measured by EBITDA, but has lower profitability with an EBITDA margin of around 30%, compared with Geo Dipa's above 50%. Aneka Gas' easing capex and commitment to deleveraging underpins its Positive Outlook compared to Geo Dipa's planned higher capex.

Key Assumptions

- Electricity generation of 887 gigawatt hours (GWh) in 2021, 956GWh in 2022, 903GWh in 2023 and 1,267GWh in 2024 (2020: 857GWh);

- EBITDA margin to remain below 55% in 2021-2023 (2020: 53.7%) due to additional costs from new projects;

- Capex of almost IDR1 trillion in 2021, and above IDR2 trillion each year in 2022-2023. New capex will be mainly for the second units of the Dieng and Patuha power plants.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

- Further strengthening of likelihood of support from the state.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

- Weakening likelihood of support from the Indonesian government to Geo Dipa.

For the sovereign rating of Indonesia, the following sensitivities were outlined by Fitch in a rating action commentary on 22 November 2021:

Factors that could, individually or collectively, lead to negative rating action/downgrade:

- Public Finances: A continued increase in the overall public debt burden over the next few years to levels well beyond our current forecasts, for example, resulting from failure to reduce the fiscal deficit to pre-crisis levels or further accumulation of debt by publicly owned entities.

- Macroeconomic: A weakening of the policy framework that could undermine macroeconomic stability, for instance, resulting from continued monetary financing of the deficit in the next few years.

- External Finances: A sustained decline in foreign-exchange reserve buffers, resulting, for example, from outflows stemming from a deterioration in investor confidence or large foreign-exchange interventions.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

- External Finances: A material reduction in external vulnerabilities, for instance, through a sustained increase in foreign-exchange reserves, reduced dependence on portfolio flows or lower exposure to commodity price volatility.

- Public Finances: A marked improvement in the government revenue ratio in the next few years closer to the level of 'BBB' category peers, including from better tax compliance or a broader tax base, which would strengthen public finance flexibility.

- Structural: Significant improvement of structural indicators, such as governance standards, closer to those of 'BBB' category peers.

Liquidity and Debt Structure

Adequate Liquidity, Solid Funding Access: Geo Dipa had IDR303 billion of readily available cash at end-September 2021, against IDR208 billion of debt maturing within one year. However, it will have to rely on external borrowings to fund its large capex plan. Fitch believes Geo Dipa has good access to domestic funding due to its government-owned status. In September 2021, Geo Dipa drew down on loan facilities from the ADB and CTF to fund the second phases of its Dieng and Patuha plants.

Issuer Profile

Geo Dipa is a geothermal energy company. It is a SMV wholly owned by the Indonesian government through the MoF (94.5%) and PLN (5.5%), a wholly owned GRE. The company's existing installed capacity is 120MW and it plans to double its capacity by 2024.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

Public Ratings with Credit Linkage to other ratings

The ratings of Geo Dipa are directly linked to the credit quality of its parent, the Indonesian sovereign. A change in Fitch's assessment of the credit quality of the parent would automatically result in a change in the rating on Geo Dipa. (ends)