Fitch Affirms Geo Dipa at 'AAA(idn)'; Outlook Stable

(Fitch Ratings - Jakarta - 29 Nov 2023)-- Fitch Ratings Indonesia has affirmed PT Geo Dipa Energi (Persero)'s National Long-Term Rating at 'AAA(idn)'. The Outlook is Stable.

The rating reflects that the government guarantee for about 90% of Geo Dipa's debt as of end-September 2023 (end-2022: about 80%). We equalise Geo Dipa's rating with that of the Indonesian sovereign (BBB/Stable), based on the single factor of the government guarantee exceeding 75% of total debt under our Government-Related Entities (GRE) Rating Criteria.

Geo Dipa's 'a-(idn)' Standalone Credit Profile (SCP) reflects its long operational history, strong counterparties, stable margins and long-term revenue visibility. These are balanced against its small operational scale and deterioration in leverage from debt-funded expansion.

'AAA' National Ratings denote the highest rating assigned by the agency in its National Rating scale for that country. This rating is assigned to issuers or obligations with the lowest expectation of default risk relative to all other issuers or obligations in the same country or monetary union.

Key Rating Drivers

Government Guarantees: Geo Dipa's rating is equalised with that of the sovereign under the GRE criteria, with the government guaranteeing over 75% of Geo Dipa's debt. We expect the proportion of government-guaranteed debt to remain above 75% over the medium term. Its loan facilities for funding expansion capex from Asian Development Bank (ADB, AAA/Stable) - USD300 million from ADB and USD35 million from ADB Clean Technology Fund (CTF) - are fully guaranteed by the state through PT Penjaminan Infrastruktur Indonesia (Persero) (BBB/Stable) and Indonesia's Ministry of Finance (MoF).

Medium-Term Debt-Funded Capex: We expect Geo Dipa's EBITDA net Leverage to rise gradually to above 4.5x in 2024 and above 6.0x in 2025 (2022: 2.4x). This will be driven by the additional debt for the Patuha-2 and Dieng-2 projects. These two projects will increase Geo Dipa's annual capex significantly to around IDR1.5 trillion-1.8 trillion (2023 estimate: below IDR1 trillion).

Cost Overruns, Funding: Geo Dipa anticipates Patuha-2 and Dieng-2 projects will face cost overruns of around 21%, reaching USD569 million on account of delays and higher costs. Fitch has incorporated the delays and cost overruns in its forecast. Geo Dipa had expected both projects to be operational in 2025 but efforts to change the regulatory requirements on the composition of domestic component level in the projects to accommodate the ADB's procurement guideline have partly led to delays in finalising project contracts; the company now expects the project to start in early 2027.

Geo Dipa aims to secure additional loans from ADB for the cost overruns and expects the loans to mirror the terms of current loans, including government guarantees. Any delay in securing funding can result in further delays for these projects.

Large Projects Pipeline: Geo Dipa manages 855MW of geothermal resources (in addition to operating capacities mainly at Dieng-1 and Patuha-1) including ongoing Patuha-2 and Dieng-2. These resources are at various stages, including Dieng-3&4, and Patuha-3 expansions and the Candradimuka exploration. Geo Dipa expects to develop these projects following the commencement of the Patuha-2 and Dieng-2. Geo Dipa is also exploring additional geothermal-related opportunities.

Fitch has not incorporated any projects beyond Patuha-2 and Dieng-2 in its forecast due to uncertainty around the timing and budget amid delay in Geo Dipa's ongoing projects Nonetheless, we anticipate that unexpectedly high debt-funded capex without commensurate additional equity could put pressure on Geo Dipa's SCP. A funding mix shifting its government-guaranteed loan proportion below 75% may also affect its rating.

Long-Term Revenue Visibility: Geo Dipa has long-term revenue visibility supported by power-purchase agreements (PPAs) with PT Perusahaan Listrik Negara (Persero) (PLN, BBB/Stable) that extend over the next 20 years of its entire output. This, together with relatively steady operations, supports stable operating cashflows. We forecast Geo Dipa's operating cashflows to range between IDR385 billion and IDR425 billion over the next three years (2022: IDR401 billion).

Concentrated Operation: Geo Dipa's operations are highly concentrated, with only two main power plants (Dieng and Small Scale, and Patuha). However, we believe this risk is reduced by extensive insurance coverage, including for damage to property and business interruption loss. The proposed expansion should help reduce concentration risk over medium term, in our view.

'Very Strong' Support Record, Implications of Default: Geo Dipa's support record is assessed as 'Very Strong'. Government support for Geo Dipa has been consistent, with equity injections in 2015 and 2020 to develop renewable power plants in addition to the guarantee. The high proportion of guaranteed debt means 'Very Strong' financial implications of default. We continue to assess ownership and control as 'Strong' and the socio-political implications of default as 'Weak'. Even so, these factors do not influence the rating as long as Geo Dipa's government-guaranteed debt remains above 75% on a sustained basis.

Derivation Summary

Geo Dipa can be compared with PT Pupuk Indonesia (Persero) (PTPI, AAA(idn)/Stable), whose rating is also equalised with the government. Geo Dipa's rating is equalised with the state's due to our single factor assessment of more than 75% of its debt being government-guaranteed. On the other hand, PTPI has 'Strong' financial implications of default, given the associated implications for the state's ability to support other GREs due to its status as a subsidy recipient. We assess PTPI's support record as 'Very Strong', as it receives a regular direct subsidy based on the annual state budget.

PTPI has 'Very Strong' status, ownership and control. We expect PTPI to remain fully owned by the government as the distributor of subsidised fertiliser. PTPI also has 'Very Strong' socio-political implications of default. The failure of PTPI would be detrimental to the distribution of fertiliser, which would affect the well-being of 33.4 million farmers and ultimately the country's food security.

Key Assumptions

Fitch's Key Assumptions Within the Rating Case for the Issuer:

- Electricity generation of 862GWh in 2023, 825GWh in 2024, 868GWh in 2025, and 871GWh in 2026 (2022: 797GWh);

- Tariff increase based on inflation that is in line with Geo Dipa's PPA with PLN;

- EBITDA margin to remain at around 50% in 2023-2025 (2022: 53%), incorporating volatility of output level;

- Minimal working-capital requirements, given the nature of its utilities business;

- Capex of IDR1.5 trillion in 2024 and IDR1.8 trillion in 2023 (2022: IDR433 billion, 9M23: IDR280 billion), considering expected engineering, procurement, and construction works during 2024-2026 for the Patuha-2 and Dieng-2 projects.

RATING SENSITIVITIES

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

No positive rating action is possible, as the company is already at the highest level on the national scale.

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

- Negative rating action on the sovereign;

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

- Any material changes in Geo Dipa's shareholding structure.

For the sovereign rating of Indonesia, the following sensitivities were outlined by Fitch in a rating action commentary on 1 September 2023:

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

- 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.

- Public Finances: A material increase in the overall public debt burden closer to the level of 'BBB' category peers; for example, resulting from rising fiscal deficits or accumulation of debt by publicly owned entities.

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

- 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.

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

- Structural: Significant improvement in 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 IDR374 billion of readily available cash at end-September 2023, against IDR53 billion of debt maturing within one year. The company will have to rely on external borrowings to fund its large capex plan. Fitch believes Geo Dipa has solid access to domestic banks and development finance institutions due to its government-owned status and large share of guaranteed debt.

Geo Dipa still has ample headroom from ADB and CTF to fund the second phase of its Dieng and Patuha plants. It has used USD128 million of USD300 million available from an ordinary capital resources limit and USD2 million of USD35 million available from a CTF limit.

Issuer Profile

Geo Dipa is a geothermal energy company. It is a special mission vehicle owned by the Indonesian government through the MoF (94.5%) and PLN (5.5%). The company's installed capacity is 130MW and it plans to double its capacity by 2027.

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)