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

(Fitch Ratings - Jakarta - 15 Dec 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.

We expect to resolve the watch once Geo Dipa secures contingency funding, a condition for drawing down on a loan from the Asian Development Bank (AsDB, AAA/Stable) that is guaranteed by the state. In August 2020, Geo Dipa signed loan agreements and a guarantee agreement with the AsDB, PT Penjaminan Infrastruktur Indonesia (Persero) (PII, BBB/Stable) and Indonesia's Ministry of Finance for two loan facilities of USD300 million from AsDB and USD35 million from AsDB Clean Technology Fund (CTF) for its projects to add 120MW of capacity.

Geo Dipa is currently in the process of securing the contingency funds from banks. Geo Dipa expects to be able to draw down the loan by early 2021. These additional loan facilities are covered by unconditional guarantees from the government, which will strengthen the likelihood of support from the government, as set out in Fitch's Government-Related Entities Rating 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.

Under Fitch's criteria, a GRE's rating will be equalised with that of the sovereign if the government guarantees more than 75% of the adjusted debt of the GRE, without regard for whether the payments will be timely or whether the level of the guarantee might change.

Geo Dipa's 'A(idn)' rating benefits from a one-notch uplift from its standalone credit profile of 'a-(idn)', based on the overall support score of 12.5 in accordance with Fitch's Government-Related Entities Rating Criteria. 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

Funding Package Finalisation: Geo Dipa is in the process of securing additional contingency funds as part of the conditions for the AsDB loan withdrawal. Fitch expects the resolution of the funding arrangements and, consequently, the loan withdrawal in early 2021 - rather than at the end of 2020 as we had initially expected.

'Strong' Ownership and Control: The Indonesian government ultimately owns 100% of Geo Dipa, mainly via the Ministry of Finance, and has strong influence over Geo Dipa's investment, strategy, and operational decisions. Geo Dipa is one of the Special Mission Vehicles (SMV) of Indonesia with the mandate to fulfil the government's long-term target for renewable energy.

'Moderate' Support Record: Support from the government to Geo Dipa has been consistent and in line with the government's commitment to fund 20%-30% of its planned projects. Geo Dipa received equity injections in 2015 and 2020 to develop renewable power plants. Recently, the finance ministry also provided guarantees for direct loans and CTF loan facilities that will account for more than 90% of Geo Dipa's total debt starting 2021.

Our current 'Moderate' assessment does not factor in the recent equity infusion and guarantee on the proposed debt. Fitch will reassess the support record rating factor once Geo Dipa secures the additional contingency funds.

'Weak' Socio-Political Implications of Default: We believe that a default by Geo Dipa will not materially disrupt Indonesia's power generation in general and even geothermal production due to its small scale. Geo Dipa has only 120MW of capacity with two operating plants.

'Moderate' Financial Implications of Default: A default by Geo Dipa would have minimal impact on the availability or cost of financing for the government and other state-owned enterprises. However, Fitch believes that this factor is likely to be assessed at a stronger level when the portion of Geo Dipa's loans guaranteed by the government rises; guaranteed debt will likely constitute more than 75% of company's total outstanding debts over 2021-2023.

A stronger assessment of this rating factor may lead Fitch to assess Geo Dipa's rating using a top-down approach from the sovereign rating, which could result in a multi-notch upgrade.

Long-Term PPAs, Stable Operations: 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. The PPAs require Geo Dipa to maintain availability factors above 75% at its Patuha plant and 50% at Dieng to be eligible for capacity payments.

Minimal Coronavirus Impact: Fitch expects Geo Dipa to be able to maintain stable operating metrics over the next 18-24 months as its maintenance plans are significantly completed. Operations so far in 2020 have not been affected by the coronavirus pandemic, apart from a delay in construction. 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, above the thresholds required under the PPA.

Concentrated Operation; Small Scale: Geo Dipa's operations are highly concentrated with only two power plants. This 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.

Leverage to Rise: Fitch expects Geo Dipa's free cash flow to turn negative in 2021-2023 due to the large debt-funded capex. Most of the capex will be spent over those years as capex initially planned for 2020 was deferred as construction was delayed by the pandemic. We estimate Geo Dipa's FFO net leverage to rise above 7.0x in those years (2019: 0.3x) and fall below the negative sensitivity of 5.5x from 2024, once the new capacity is fully operational following the long lead time of over 36 months for the main projects. We expect Geo Dipa's FFO based fixed-charge cover to remain comfortably above 3x over this period.

DERIVATION SUMMARY

Geo Dipa's 'A(idn)' rating is one notch above its standalone credit assessment of 'a-(idn)' to take into account its linkages with the Indonesian government. The Rating Watch Positive on its National Long-Term rating reflects the stronger likelihood of support given the guarantee from the government for its proposed debt.

The standalone credit 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 or negative free cash flow and better leverage (FFO net leverage above 3.0x). Geo Dipa maintained positive free cash flow with leverage of below 1.0x at end-2019, but we expect its upcoming investments to increase 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.

KEY ASSUMPTIONS

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

- Electricity generation of 820 gigawatt hours (GWh) in 2020, 890GWh in 2021 and 960GWh in 2022 (2019: 806GWh)

- EBITDA margin to remain below 55% in 2020-2022 (2019: 52.6%) due to additional cost from new projects

- Lower capex of IDR383 billion in 2020, and above IDR2 trillion per annum in 2021 and 2022

- New capex mainly for the second units of the Dieng and Patuha power plants and a small-scale power plant in Dieng.

- IDR700 billion equity injection in 2020 from the government and nil thereafter.

RATING SENSITIVITIES

Fitch will resolve the Rating Watch Positive on Geo Dipa after the finalisation of funding arrangements for its proposed investments in its Dieng and Patuha second units.

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

- Strengthening of linkages and likelihood of support from the government. A significant strengthening in the likelihood of support may result in Geo Dipa being rated on a top-down basis from the Indonesian sovereign.

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

- Negative rating action is unlikely as the rating is on RWP.

- The rating may be affirmed at the current level:

- If Fitch assesses the linkages with the state have remain unchanged after the finalisation of the proposed funding arrangements, or

- If Geo Dipa's standalone assessment weakens together with a modest strengthening of the likelihood of support from the state.

For Geo Dipa's Standalone Credit Assessment:

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

- Positive rating action is unlikely over the medium term given Fitch's expectation that the company's financial profile will weaken due to the large investment plan.

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

- Rising execution risk related to proposed investments or large investments in addition to those already considered by Fitch, that may weaken the company's financial profile such that:

- FFO net leverage remains above 5.5x (2019: 0.3x) for a sustained period.

- FFO fixed-charge coverage falls below 3.0x (2019: 5.0x) for a sustained period.

LIQUIDITY AND DEBT STRUCTURE

Adequate Liquidity: Geo Dipa had IDR358 billion of readily available cash at end-September 2020, sufficient to cover around IDR191 billion of debt maturing within one year. However, it will have to rely on external borrowings to fund its large capex plan.

Fitch believes Geo Dipa has good access to domestic funding due to its government-owned status, which gives it easy access to funding. Geo Dipa recently secured a USD19 million loan from PT Sarana Multi Infrastruktur (Persero) (SMI, BBB/AAA(idn)/Stable) to finance its small-scale power project and is in the process of finalising loans from AsDB and CTF that will fund the second phases of its Dieng and Patuha plants. In our view, the company's cash flow from current operations will be adequate to cover the maturities of its existing debt over the medium term as state support will help to cover its expansion plans.

SUMMARY OF FINANCIAL ADJUSTMENTS

We exclude IDR100 billion from the restricted cash account and included it as readily available cash due to its nature as pledged cash. We add back the unamortised transaction cost of IDR7 billion to long-term loans. (ends)