Fitch Assigns Pertamina Geothermal Energy First-Time 'BBB-' Rating; Outlook Stable

(Fitch Ratings - Singapore - 17 Apr 2023)-- Fitch Ratings has assigned PT Pertamina Geothermal Energy (PGE) a first-time Long-Term Foreign-Currency Issuer Default Rating (IDR) of 'BBB-' with a Stable Outlook. Fitch has also assigned a 'BBB-' rating to PGE's proposed green bonds.

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

PPI's credit profile is linked to its ultimate parent, Pertamina, the state-owned national oil company of Indonesia (BBB/Stable), using a top-down approach. We assess Pertamina's legal, strategic and operational incentives to support PPI as 'Medium', given PPI's key role in the parent's energy transition plans.

PGE's Standalone Credit Profile (SCP) of 'bb' reflects its modest operating capacity, asset concentration, earnings visibility and relatively strong financial profile.

Key Rating Drivers

Energy Transition Drives Strategic Importance: We believe Pertamina has 'Medium' strategic incentive to support PPI, and therefore PGE, due to PPI's key role as the main vehicle for increasing Pertamina's new and renewable energy (NRE) capacity to 17% of its energy mix by 2030 (2021: 1%). This is aligned with the Indonesian government's target of increasing the share of NRE to at least 23% and 30% (2021: 11.5%) of the national energy mix by 2025 and 2030, respectively.

PPI plans to spend USD3.7 billion of capex, including USD2.1 billion on PGE, during 2023-2026 to boost NRE installed capacity to 5GW (2022: 687MW), including over 3GW of solar capacity and 1GW at PGE (2022: 672MW). Our assessment reflects PPI's strong growth potential, although its financial contribution to Pertamina will remain minimal over the medium term due to its small size compared to the parent's core oil and gas business.

'Medium' Legal, Operational Support Incentives: PPI qualifies as a material subsidiary under the cross-default provision of Pertamina's senior unsecured notes. We believe PPI's investment plans will result in significant external debt over the next four years. All of its current debt is from its parent, although we expect the proportion of shareholder loans to fall over the medium term. Pertamina owns 100% of PPI, appoints its management and board, and exerts strong control. In return, PPI benefits from operational synergies between its geothermal energy and Pertamina's upstream oil and gas business.

PGE in Key Position: We expect PGE to continue to remain PPI's largest subsidiary in terms of financial contribution over the next 3-4 years. PGE is expected to account for 21% of PPI's total installed renewable capacity by 2026, but will contribute around 65% of PPI's EBITDA. PGE contributes almost the entire earnings and asset base of PPI. PGE aims to continue expanding its geothermal capacity. 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.

Doubling Capacity, Modest Leverage: PGE aims to almost double its generation capacity to over 1.2GW by end-2027, with capex of about USD2.8 billion and an average annual outlay of above USD500 million from 2024 (2022: USD27 million, 2023E: USD230 million). It plans to fund capex with a mix of internal cash flow, USD580 million in proceeds from its IPO in February 2023, and debt. Nevertheless, we expect PGE's leverage to remain comfortable for its SCP despite its large capex. We estimate PGE's EBITDA net leverage to stay below 4x even during peak capex periods (2022: 2.2x, 2021: 2.8x).

Asset Concentration to Decline: PGE's asset concentration should decline modestly 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 with usually separate wells. This mitigates concentration risk and has helped PGE's availability factor to stay above 95% in the past three 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 was above 23 years as of end-2022. The contracts provide price certainty, as tariffs are fixed for the life of the contracts with automatic annual adjustment for inflation, and 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. PGE reported that its average trade receivable days were around 70 days.

Derivation Summary

Fitch uses the "stronger parent" path under the PSL rating criteria to rate PGE, and PGE's rating is one notch below its ultimate parent, Pertamina. PGE's rating is aligned with Fitch's internal assessment of its immediate parent, PPI, as PGE accounts for most of PPI's financials and is the key entity within the PNRE sub-holding held by PPI. PGE is a strategically important entity in the group, as it will drive Pertamina's energy transition target.

The one-notch of difference arises from PGE's distinction from Pertamina's core asset and business of the upstream exploration and production segment, and the fact that fossil fuel will continue to hold a key position in the energy security of the country for at least a decade.

The rating approach is similar with that for PT Perusahaan Gas Negara Tbk (PGN, BBB-/Stable) and Beijing Energy International Holding Co., Ltd. (BEIH, A/Stable), which are also rated one notch below their respective parents under our PSL rating criteria.

PGN is the sub-holding company for Pertamina's gas business and accounts for over 90% of its gas distribution and 100% transmission in Indonesia. We view both PPI and PGN as having 'Medium' strategic importance to Pertamina. Similar to PGE, PGN's financial contribution to Pertamina is not material - PPI and PGN contributed around 4% and 12%, respectively, to Pertamina's EBITDA in 2021. Fitch views PPI and PGN as having 'Medium' operational synergies with Pertamina, but Pertamina has greater control over PPI due to its 100% ownership, than over PGN, in which it has a 56.9% stake.

Fitch views BEIH as a strategically important renewable-energy investment platform for the 32% parent, Beijing Energy Holding Co., Ltd. (BEH, A+/Stable), which manages most of Beijing's gas power plants and operates the city's largest heating network. BEIH plans to account for 73% of the group's renewable energy capacity target by end-2025 and help fulfil BEH's mandate of improving Beijing's energy mix. The legal incentives are 'Medium' because 36% of BEIH debt is guaranteed by BEH and we expect the proportion to go down.

BEIH and BEH have low operational synergies, although BEH appoints BEIH's management and board and they share the same brand, resulting in 'Medium' operational incentives to support.

Key Assumptions

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

- Installed capacity to reach around 750MW by 2025 and 1GW by 2027 (2022: 672MW);

- Average plant loan factor of above 70%;

- 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%;

- Capex of USD2.1 billion during 2023-2026;

- Dividend payout ratio of 25% of net profit.

RATING SENSITIVITIES

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

- 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 7 February 2023:

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 receiving government support.

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

- Negative rating action on the sovereign;

- Weakening of the likelihood of state support.

Best/Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

Comfortable Liquidity: PGE's cash was around USD220 million at end-2022, against USD615 million of debt maturity within a year. The debt maturity mainly comprises USD600 million of outstanding balance of bridge loans maturing in June 2023. PGE's liquidity would substantially improve if it succeeds in issuing its green bond.

In the absence of the bond, the company would be able to partially pay the bridge loan using its IPO proceeds and internal cash, and refinance the balance through bank loans, if required. We regard PGE as having adequate financial flexibility, buoyed by solid access to shareholder loans and external financing, and aided by parental support.

Issuer Profile

PGE is an Indonesian geothermal company, established since 2006. PGE has total operating capacity of 672MW under its own working area and 1,205MW under joint operating contracts at end-June 2022. 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 will result in a similar revision in PGE's ratings.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entities, either due to their nature or to the way in which they are being managed by the entities. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg. (ends)