Fitch Maintains Geo Dipa's 'A(idn)' National Rating on Rating Watch Positive

(Fitch Ratings - Jakarta - 18 Jun 2020)--Fitch Ratings has maintained PT Geo Dipa Energi (Persero)'s National Long-Term Rating of 'A(idn)' on Rating Watch Positive (RWP).

Fitch placed the ratings of Geo Dipa on RWP on 30 December 2019. Fitch is maintaining the RWP because we continue to expect Geo Dipa to receive significant support from its parent, the Indonesian sovereign (BBB/Stable), for its proposed investments.

Geo Dipa recently announced that the board of the Asian Development Bank (AsDB, AAA/Stable) has approved two loans of USD300 million from AsDB and USD35 million from AsDB Clean Technology Fund (CTF) for its projects to add 120MW of capacity. It has also received approval in-principle for a guarantee from Indonesia's Ministry of Finance (MoF) for both the loans. Geo Dipa expects to finalise the loans and guarantee by this month, although Fitch believes any delay in processes may affect that timing. Finalisation of the guarantee will strengthen linkages between the state and the company, as set out in Fitch's Parent and Subsidiary Rating Linkage criteria and result in a rating upgrade. Geo Dipa could be rated on a top-down basis, in our view, and this may result in a rating upgrade of more than one notch.

Geo Dipa's 'A(idn)' rating benefits from its moderate linkages with the sovereign, resulting in a one-notch uplift from its standalone credit assessment of 'a-(idn)'. The standalone credit assessment is underpinned by Geo Dipa's long operational history with strong counterparty exposure, relatively stable margins and long-term revenue visibility. These are balanced against its small scale of operations and expected deterioration in its financial profile from a substantial expansion plan.

'A' National Ratings denote expectations of a low level of default risk relative to other issuers or obligations in the same country or monetary union.

KEY RATING DRIVERS

Proposed Loans: The MoF has approved in-principle to extend a guarantee for the two loans from AsDB and CTF. The final approval for the guarantee will coincide with finalisation of the loan agreement. The loans are to fund the second units of the Patuha and Dieng plants, which have a total cost of around USD450 million.

Moderate Linkages with Sovereign: We assess the linkages between Geo Dipa and the state as 'Moderate', under the Parent and Subsidiary Rating Linkage criteria. The state owns 93.3% of Geo Dipa directly via the MoF, appoints its boards of directors and commissioners, and has strong influence over the company's investment, strategy and operation decisions. The state also provided tangible support for power plant development through equity injections of IDR607 billion in 2015 and a planned IDR700 billion in 4Q20. Geo Dipa says the state is committed to fund 20%-30% of each of its planned projects.

Long-Term PPAs: Geo Dipa's long-term cash flows are predictable, supported by its power-purchase agreements (PPAs) with another state-owned entity, PT Perusahaan Listrik Negara (Persero) (PLN; BBB/Stable), that extend over the next 20 years for its entire output. The PPAs provide protection from price risk. The take-or-pay nature of the PPAs also provides volume protection, but production volume may vary with steam availability.

Stable Operations: Fitch expects the company to be able to maintain stable operating metrics over the next 18-24 months as its maintenance plans are significantly completed. Fitch expects Geo Dipa's average availability factor and capacity factor to remain at around 90% (2019: 97% and 84%, respectively) over the medium term. The PPAs require Geo Dipa to maintain its availability factor above 75% at its Patuha plant and 50% at the Dieng plant to be eligible for capacity payments under the PPAs, which the company has been able to achieve.

Operations Not Affected by Coronavirus: Geo Dipa says its operations have not been affected by the coronavirus pandemic, aside from delays in project construction work. The power offtake from its sole offtaker, PLN, has been stable.

Small Scale; Concentrated Operations: Geo Dipa has 120 MW of capacity with two operating plants, which results in high asset concentration. The expansion plan will add to scale and improve operational efficiency in the long term. The asset concentration risk was evident from an operation shutdown in 2013 due to a fire at the company's only operating plant at Dieng at the time. However, the risk is mitigated by extensive insurance coverage, including for damage to property and business interruption loss.

Large Expansion Plan: Geo Dipa expects to double its capacity to 250 MW by 2023. The company plans to add a second unit each at its Dieng and Patuha plants. Other investments include a small-scale power plant at Dieng. The company expects the additional capacity to be fully operational by 2023. Fitch believes execution risk for the expansion plan is manageable as Geo Dipa has a long history of managing power plants, and most of its new capacity is at existing operating sites.

Long Lead Time; Increasing Leverage: Fitch expects Geo Dipa's free cash flow to turn negative in 2020-2023 due to the large capex, which is likely to be largely debt funded. We estimate Geo Dipa's FFO net leverage to weaken to around 3.0x by 2021 (2019: 0.3x) and peak at around 7.5x in 2022-2023. We expect leverage to fall below the negative sensitivity of 5.5x from 2024, once the new capacity is fully operational, after the long lead time of over 36 months for the main projects. However, we expect Geo Dipa's FFO based fixed-charge cover to remain comfortably above 3x over this period.

Manageable Funding Risk: Funding for the company's projects benefits from its direct ownership by the MoF, which enables easy access to loans, and makes it eligible for the government guaranteed debt. It is also given preference for the government-sponsored Geothermal Fund (PISP) used for exploration, through which its Candradimuka project's exploration will be financed. Geo Dipa received a low-cost loan at end-2019 from sister company PT Sarana Multi Infrastruktur (Persero) (SMI, AAA(idn)/Stable) to finance its small scale power project. Management estimates the proposed expansions will require investment of around IDR7 trillion compared with its 2019 EBITDA of IDR418 billion.

DERIVATION SUMMARY

Geo Dipa's rating is one notch above its standalone credit assessment of 'a-(idn)' to take into account its linkages with the Indonesian government. This assessment is well-positioned relative to national peer, PT Aneka Gas Industri Tbk (Aneka Gas; A-(idn)/Stable).

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 EBITDAR margin of around 30%, compared with Geo Dipa's around 55%. Aneka Gas's capex intensity is expected to remain lower than that of Geo Dipa, resulting in neutral-negative free-cash-flow and better leverage (FFO net leverage above 3.0x). Geo Dipa maintained positive FCF with leverage of below 1.0x at end-2019, but we expect its upcoming investments to increase its leverage, which will only normalise after reaching around 7.5x at the peak of its investment cycle. As a result, Fitch assesses the two companies' credit profiles at a similar level. (ends)