Fitch Affirms Pertamina Geothermal Energy at 'BBB-'; Outlook Stable

(Fitch Ratings - Singapore - 17 Apr 2024)--Fitch Ratings has affirmed PT Pertamina Geothermal Energy Tbk's (PGE) Long-Term Foreign-Currency Issuer Default Rating (IDR) of 'BBB-', with a Stable Outlook. Fitch has also affirmed the 'BBB-' senior unsecured rating.

PGE's rating is aligned with its immediate parent, PT Pertamina Power Indonesia (PPI) - head of Power and New and Renewable Energy (PNRE), a sub-holding of PT Pertamina (Persero) (Pertamina, BBB/Stable) - under Fitch's Parent Subsidiary Linkages (PSL) Rating Criteria. This is based on our assessment of 'Low' legal, 'High' strategic and operational incentives for PPI to support PGE.

PPI's credit profile is linked to its ultimate parent - Pertamina, Indonesia's integrated oil & gas company - using a top-down approach. We assess Pertamina as having 'Medium' legal, strategic and operational incentives to support PPI, given PPI's key role in the energy-transition plans of the parent.

PGE's standalone credit profile (SCP) of 'bb' reflects modest operating capacity; asset concentration; earnings visibility from long-term sale contracts for its entire operating capacity with a single - albeit sound - counterparty; and a strong financial profile.

KEY RATING DRIVERS

Medium Strategic Incentives: We believe Pertamina has a 'Medium' strategic incentive to support PPI, and therefore PGE, from PPI's role as the main vehicle to raise Pertamina's new and renewable energy (NRE) capacity to 17% of its energy mix by 2030 (2023: 1%). This is aligned with Indonesia's target to boost NRE to at least 23% and 30% (2022: 15.5%) by 2025 and 2030, respectively. We view PPI as having high growth potential, although its financial contribution to Pertamina will remain minimal over the medium term from its small size relative to parent's core business.

PPI plans capex of USD3 billion (including acquisitions and investments in JVs) during 2024-2027 to boost gas to power and NRE's installed capacity to 4.2GW (2023: 2.5GW including JVs). This includes USD2.6 billion of capex and over 520MW of capacity addition at PGE. PPI has pushed forward its NRE installed capacity targets, from 5GW by 2026, as it faced delays in execution of a few projects and a lacklustre local renewable market. PPI is now considering expanding in offshore markets as well.

Medium Legal and Operational Incentives: PPI is a material subsidiary under the cross-default provision of Pertamina's senior unsecured notes. We believe PPI's capex plans will result in significant external debt in the next four years (PPI excluding PGE was debt-free in 2023). Pertamina owns 100% of PPI, appoints its management and board, and exerts strong control. PPI enjoys operational synergies between its geothermal energy and Pertamina's upstream oil and gas businesses.

PGE's Key Position: We believe PGE has high strategic importance as the key driver for PPI's capacity expansion, and should remain PPI's largest subsidiary by financial contribution in the next three to four years. PGE should account for 28% of PPI's total installed renewable capacity by 2027, but contributes over 75% of PPI's EBITDA. PGE currently contributes almost the entire earnings and asset base of PPI. The stable nature of geothermal operations and high geothermal potential in Indonesia augments its role in both Pertamina's and the country's energy transition plans.

Our assessment of 'high' operational incentives for PPI to support PGE is underpinned by PPI's strong control over PGE. This includes appointing its board and management, and approving capex and the annual budget. The absence of debt guaranteed by PPI and a cross-default provision in PPI's debt (PPI excluding PGE was debt free in 2023) results in 'low' assessment for legal incentives for PPI to support PGE.

Doubling Capacity; Modest Leverage: PGE aims to almost double its generation capacity to close to 1.2GW by end-2027, with capex of USD2.6 billion during 2024-27 (2023: USD59 million). It plans to fund capex via internal cash flow, around USD400 million of remaining IPO proceeds, and debt. Nevertheless, we expect PGE's leverage to be comfortable for its SCP. We estimate its EBITDA net leverage to stay below 3x even in peak capex periods (2023: 0.2x).

Acquisitions Treated as Event Risk: PGE plans to acquire 175MW capacity in the near term to achieve its installed capacity targets, as a few of its organic expansion projects are pushed forward from procedural delays. Fitch expects PGE to cross 900MW of installed capacity by 2027, and will treat acquisitions as event risk. PGE is seeking both offshore and onshore expansion, and most of its discussions are in the early stages.

Asset Concentration to Decline: PGE's asset concentration should ease after expansion. The contribution from Kamojang and Ulubelu - its two key operating geothermal working areas (WKPs) out of six - will decline to about 25% each of total production, from almost 35%. Most of the WKPs have multiple operating units, usually with separate wells. This mitigates concentration risk, and has helped PGE's availability factor to stay above 95% in the past four years. PGE has 1.2GW of operating capacity under the joint operation contract, although the contribution to PGE's cash flow is minimal.

Strong Counterparty; Cash Flow Visibility: PGE has low counterparty risk as it sells its entire steam and electricity volume to sovereign-owned utility PT Perusahaan Listrik Negara (Persero) (PLN, BBB/Stable) under long-term (usually 30-year) sales contracts. The average remaining life of PGE's sales contracts is above 22 years. The contracts provide price certainty, as tariffs are fixed for the life of the contracts with automatic annual adjustment for inflation, and with some volume protection as most contracts include a 'take-or-pay' clause. PLN has a history of timely payments to PGE, resulting in stable cash flow.

DERIVATION SUMMARY

Fitch uses the "stronger parent" path under the PSL rating criteria to rate PGE, and PGE's rating is indirectly linked to that of its ultimate parent, Pertamina. We assess Pertamina has medium legal, operational and strategic incentives to support PGE's immediate parent, PPI, while PPI has strong operational and strategic incentives to support PGE, albeit low legal incentives.

The rating approach is similar to that for PT Perusahaan Gas Negara Tbk (PGN, BBB-/Stable), which is also rated under a top-down approach from Pertamina under our PSL rating criteria.

KEY ASSUMPTIONS

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

- Installed capacity to reach above 750MW by 2026 and above 900GW by 2027 (2023: 672MW) excluding inorganic expansions

- Average plant load factor of above 75% (2023: 89%)

- Selling price per unit based on existing price per contract, with escalation for inflation if applicable - based on the contract for each working area

- EBITDA margin of around 80% (2023: 82%)

- Capex of USD1.8 billion during 2024-2027

- Dividend pay-out ratio a maximum of 50% of net profit

RATING SENSITIVITIES

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

- Any positive rating action on Pertamina's IDR provided incentives to support remain intact between Pertamina, PPI and PGE

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

- Any negative rating action on Pertamina's IDR

- Weakening of PPI's incentives to support PGE

- Weakening of Pertamina's incentives to support PPI

For Pertamina's rating, the following sensitivities were outlined by Fitch in a Rating Action Commentary on 31 January 2024:

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

- Positive rating action on the sovereign, provided there is no significant weakening in Pertamina's likelihood of government support

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

- Negative rating action on the sovereign

- Weakening in the likelihood of state support

LIQUIDITY AND DEBT STRUCTURE

Comfortable Liquidity: PGE liquidity benefits from very low annual debt maturities of below USD20 million until 2028 when its only US dollar note matures, as 45% of its 2023 total debt included long-dated, amortizing term loans. PGE had a strong cash balance of USD 678million, and around USD72 million of an undrawn facility under its Japan International Corporation Agency term loan maturing in 2051, as of end-2023.

We expect PGE to generate stable annual cash flow from operations of above USD230 million, on average, though it will rely on external funding for its planned capex. We view PGE has adequate financial flexibility, buoyed by solid access to a notional pooling facility at Pertamina's group level, shareholder loans and external financing, aided by parental support.

ISSUER PROFILE

PGE is an Indonesian geothermal company, established in 2006. It had total operating capacity of 672MW under its own working area and 1,205MW under joint operating contracts at end-2023. It manages 13 geothermal working areas across Java, Sumatra and Sulawesi.

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

PGE's ratings are indirectly linked to its ultimate parent, Pertamina. Any change in Pertamina's ratings would result in a similar revision of PGE's ratings.

ESG CONSIDERATIONS

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores. (ends)