Fitch Affirms Geo Dipa's Rating at 'A(idn)'; Outlook Stable

(Fitch Ratings-Jakarta-08 August 2019)-- Fitch Ratings Indonesia has affirmed Indonesia-based geothermal energy company PT Geo Dipa Energi (Persero)'s National Long-Term Rating at 'A(idn)'. The Outlook is Stable.

Geo Dipa's Standalone Credit Profile (SCP) of 'a-(idn)' is underpinned by its robust operations, strong revenue visibility, stable margin and low leverage. The SCP is counterbalanced by the company's small scale, a probable weakening in its financial profile and additional risk arising from its upcoming investments in 2020. The rating benefits from a one-notch uplift stemming from its moderate ties with the government of Indonesia (BBB/Stable), which is in line with Fitch's Parent and Subsidiary Rating Linkage methodology.

KEY RATING DRIVERS

Long-Term PPAs; Established Operations: Geo Dipa's long-term cash flows are predictable, supported by its power-purchase agreements (PPA) with PT Perusahaan Listrik Negara (Persero) (PLN; BBB/Stable) that extend to 2053. In our view, the pricing mechanism under the PPAs enables the company to maintain strong profitability, with EBITDA margins of above 55%.

Fitch expects the company to be able to maintain its stable operating metrics over the next 18-24 months on the back of its consistent plant maintenance. Geo Dipa's average availability factor and capacity factor in 2018 remained stable at 95% (2017: 96%) and 80% (2017: 80%), respectively. The PPAs require Geo Dipa to maintain its availability factor above 75% at its Patuha units and 50% at the Dieng units to be eligible for capacity payments under the PPAs, which the company has historically been able to achieve.

Debt-Funded Investments: Geo Dipa expects to more than double its capacity to 270 megawatts (MW) by 2023 (120 MW currently); the capex is likely to be largely debt funded. The company plans to add a second unit at both its Dieng and Patuha power plants. The investments also include an additional binary power plant and a small-scale power plant in Dieng. The ground-breaking phase of the second units of the Dieng and Patuha power plants began in 2Q19 and the company is now conducting feasibility study updates on both sites before starting drilling in 2020.

Long Lead Time; High Leverage: Fitch expects Geo Dipa's free cash flow to turn negative over the next 18-24 months as capex will rise to IDR2.9 trillion in 2020 (2018: IDR28 billion). Consequently, we estimate Geo Dipa's FFO adjusted net leverage to weaken to around to 4.4x by 2020 (2018: 0.5x) and further deteriorate to about 8.0x temporarily during 2021-2022 in light of the long lead time for the projects. We expect the financial profile to improve, with leverage falling below 5.5x, the level above which Fitch may consider negative rating action, only from 2023 once Geo Dipa's expanded capacity starts operations.

Minimal Funding Risk: Fitch believes Geo Dipa's funding will remain comfortable, given its long-term PPAs, even for the proposed capacity, and its status as a state-owned enterprise (SOE), even though the investments are significantly larger considering its current operations. Management estimates the proposed expansion requires investment of USD350 million (IDR5 trillion) compared with its 2018 EBITDA of IDR470 billion. Geo Dipa plans to fund 70% of the cost through debt and is in the process of finalising a loan with a multilateral institution. Its small-scale power plant will be funded by a IDR270 billion loan from sister company PT Sarana Multi Infrastruktur (Persero) (SMI, AAA(idn)/Stable).

Execution and Operational Risk: Fitch believes Geo Dipa's investment phase has moderate execution and operational risk. We derive comfort from the company's experience with its existing plants in Dieng and Patuha with expansions also at same sites, proven potential reserve of about 400MW at each location and revenue visibility through its PPAs.

Moderate Linkages with Sovereign: We maintain our view of moderate linkages between Geo Dipa and its stronger parent, the government of Indonesia, resulting in a one-notch uplift from Geo Dipa's 'a-(idn)' SCP. Our assessment of moderate operational and strategic state linkages is underpinned by the government's control of Geo Dipa through the appointment of the boards of directors and commissioners, its approval of the company's budget, and financial support from the government with an equity injection of IDR607 billion in 2016 to fund its projects.

DERIVATION SUMMARY

Geo Dipa's rating is one notch above its SCP of 'a-(idn)' to take into account its linkages with the Indonesian government. Its SCP is well-positioned relative to national peers, such as PT Aneka Gas Industri Tbk (Aneka Gas; A-(idn)/Stable) and PT Astra Otoparts Tbk (AUTO; AA-(idn)/Stable).

Aneka Gas and Geo Dipa have similar exposure to relatively stable cash flows from long-term customer contracts. Aneka Gas is larger, measured by EBITDA, but has lower profitability with EBITDAR margin of around 30%, compared with Geo Dipa's around 60%. Aneka Gas also has aggressive capex programmes that result in negative free cash flows and high leverage (FFO net adjusted leverage more than 3.0x). Geo Dipa has maintained positive FCF with leverage of around 1.0x as of end-2018, but we expect its upcoming investments to increase its leverage to more than 4.4x by 2020 and stay above thereafter. These factors justify the similarities of the credit profiles of the two companies.

AUTO's rating also receives a one-notch uplift due to its moderate linkage with its parent, PT Astra International Tbk (Astra). This moderate linkage is demonstrated through Astra's broad presence and influence, business integration into Astra's automotive value chain as a supplier of automotive components in the original-equipment-manufacturer and replacement markets, the shared Astra brand and tangible support when Astra acted as a standby buyer to AUTO's IDR3 trillion rights issue in 2013. This is comparable with the government's control over Geo Dipa's business and support for its investment.

AUTO's stronger SCP reflects its lower EBITDA margin (around 6%) counterbalanced by its larger operating scale, its role as a market leader in the automotive-supplier segment and strong financial profile, which we expect to continue. In comparison, Geo Dipa benefits from stronger and more stable cash flows, but we expect its financial profile to deteriorate as it is entering its investment phase with leverage forecast to rise above 4.4x in 2020 and around 8x by 2021. This explains the two-notch rating difference between the two companies. (ends)