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

(Fitch Ratings - Jakarta - 11 Jun 2021)-- Fitch Ratings Indonesia 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 as we continue to expect Geo Dipa to receive significant support from the parent, the Indonesian sovereign (BBB/Stable), for the proposed investments. We expect to resolve the RWP once Geo Dipa secures contingency funding, a condition for drawing down its loan from the Asian Development Bank (ADB, AAA/Stable). Geo Dipa says it has started the process for signing the loan for the contingency fund.

These additional loan facilities are covered by unconditional government guarantees, which will strengthen the likelihood of government support, as set out in Fitch's Government-Related Entities (GRE) Rating Criteria. A GRE rating will be equalised with the sovereign under the GRE criteria if the government guarantees over 75% of a GRE's adjusted debt, without regard for whether the payments will be timely or the level of the guarantee might change.

Geo Dipa's rating benefits from a one-notch uplift from its Standalone Credit Profile (SCP) under the GRE criteria. Underpinning its SCP assessment is its long operational history with strong counterparties, stable margins and long-term revenue visibility, balanced against its small operational scale and our expectation of 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 Near Completion: Geo Dipa is in the final stage of securing additional contingency funds as the last part of the loan withdrawal conditions for the ADB loan. Fitch expects the loan withdrawal to happen in 3Q21 - delayed from our previous expectation of early 2021.

Geo Dipa signed loan agreements and a guarantee agreement in August 2020 with the ADB, PT Penjaminan Infrastruktur Indonesia (Persero) (BBB/Stable) and Indonesia's Ministry of Finance (MoF) for two loan facilities of USD300 million from ADB and USD35 million from ADB Clean Technology Fund (CTF) for the company's projects to add 120MW of capacity.

'Strong' Ownership and Control: The Indonesian government ultimately owns 100% of Geo Dipa, mainly via the MoF, 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: Government support to Geo Dipa has been consistent and in line with its commitment to fund 20%-30% of the planned projects. Geo Dipa received equity injections in 2015 and 2020 to develop renewable power plants. The MoF also recently provided guarantees for direct loans and CTF loan facilities that will account for more than 90% of Geo Dipa's total debt. Our current 'Moderate' assessment does not factor in the guarantee on the proposed debt. Fitch will reassess the support record rating factor once Geo Dipa secures the additional contingency funds.

'Weak' Socio-Political Default Implications: 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 Default Implications: A Geo Dipa default would have minimal impact on the availability or cost of financing for the government and other state-owned enterprises. However, we are likely to assess this factor at a stronger level when the portion of its government-guaranteed loans rises; guaranteed debt is likely to constitute more than 75% of its total outstanding debts in 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, and this could result in a multi-notch upgrade.

Long-Term PPAs, Stable Operations: Geo Dipa's long-term cash flow is predictable, supported by power-purchase agreements (PPAs) with state-owned 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 for capacity payments.

Fitch expects Geo Dipa to be able to maintain stable operating metrics over the next 18-24 months, as maintenance plans are significantly completed. Operations in 1Q21 were not affected by the coronavirus pandemic, apart from a delay in construction. Fitch expects Geo Dipa's average availability factor and capacity factor to remain above 90% (2020: 93% and 94%, respectively) over the medium term, which are 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 its Dieng plant, which was its only operating plant 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 250MW by 2024. It plans to add a second unit each at its Dieng and Patuha plants. The company expects the additional capacity to be fully operational by 2024. Fitch believes execution risk for the expansion plan is manageable, as Geo Dipa has a long history of managing power plants, and most of the new capacity is at existing operating sites.

Leverage to Rise: Fitch expects Geo Dipa's free cash flow to turn negative in 2021-2024 due to the large debt-funded capex. Most capex will be spent over those years, as capex initially planned for 2020 was deferred due to the pandemic. We estimate Geo Dipa's funds from operations (FFO) net leverage will rise up to 7.0x in 2023 (2020: 0.4x) and fall below the negative sensitivity of 5.5x from 2024, once the new capacity is fully operational. 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 Profile of 'a-(idn)' - based on the overall support score of 12.5 under our GRE criteria - to take into consideration its linkages and likelihood of support from the Indonesian government. The RWP on its National Long-Term Rating reflects the stronger likelihood of support given the government guarantee for its proposed debt.

Our current assessment of state support for Geo Dipa can be compared with that for Indonesian peers such as PT Wijaya Karya (Persero) Tbk's (WIKA, A-(idn)/Negative). Both Geo Dipa and WIKA are assessed as 'Strong' for the status, ownership and control attribute. Geo Dipa's support record is assessed at 'Moderate' as it receives regular support in the form of equity infusions, while that for WIKA is 'Weak'.

We assess the socio-political impact of a WIKA default as 'Moderate', because infrastructure development is a cornerstone of the government's economic growth and urbanisation agenda. Geo Dipa's 'Weak' assessment reflects its small scale and resultant minimal impact on Indonesia's power generation. The financial implications of default for both entities are 'Moderate', reflecting our expectation that a default of either entity would moderately affect the availability and cost of finance for other GREs.

The standalone credit assessment is well-positioned relative to national peer PT Aneka Gas Industri Tbk (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 an EBITDAR margin of around 30%, compared with Geo Dipa's above 50%.

We expect Aneka Gas's capex intensity 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 below 1.0x at end-2020, but we expect its upcoming investments to increase leverage, which will only normalise after reaching around 7.0x 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 887 gigawatt hours (GWh) in 2021, 956GWh in 2022 and 903GWh in 2023 (2020: 857GWh);

- EBITDA margin to remain below 55% in 2021-2023 (2020: 53.7%) due to additional cost from new projects;

- Capex of almost IDR1 trillion in 2021, and above IDR2 trillion each year in 2022-2023. New capex will be mainly for the second units of the Dieng and Patuha power plants.

RATING SENSITIVITIES

Fitch will resolve the RWP on Geo Dipa after the finalisation of funding arrangements for the proposed investments in the phase two expansions of the Dieng and Patuha units.

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

- Further strengthening of linkages and likelihood of support from the state. 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:

- Fitch assesses the strength of linkages and likelihood of support to have remain unchanged after the finalisation of the proposed funding arrangements; or

- Geo Dipa's Standalone Credit Profile weakens together with a modest strengthening of the likelihood of support from the state.

For Geo Dipa's Standalone Credit Profile

Developments that may, individually or collectively, lead to positive action:

- 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.

Developments that may, individually or collectively, lead to negative action:

- 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 (2020: 0.4x) for a sustained period;

- FFO fixed-charge coverage falls below 3.0x (2020: 9.5x) for a sustained period.

LIQUIDITY AND DEBT STRUCTURE

Adequate Liquidity, Solid Funding Access: Geo Dipa had IDR266 billion of readily available cash at end-March 2021, against IDR166 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. Geo Dipa is in the process of finalising loans from ADB and CTF that will fund the second phases of its Dieng and Patuha plants.

Fitch believes that the company's cash flow from current operations will be adequate to cover the maturities of existing debt over the medium term, as state support will help to cover expansion plans.

ISSUER PROFILE

Geo Dipa is a geothermal energy company. It is a SMV wholly owned by the Indonesia government through the MoF (93.33%) and PLN (6.67%), a wholly owned GRE. The company's existing installed capacity is 120MW and it plans to double its capacity by 2024.