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

(Fitch Ratings - Jakarta - 30 December 2019)--Fitch Ratings Indonesia has placed Indonesian state-owned geothermal power producer PT Geo Dipa Energi (Persero)'s National Long-Term Rating of 'A(idn)' on Rating Watch Positive (RWP).

The RWP is based on expectations of additional support from its parent, the Indonesian sovereign (BBB/ Stable) for its proposed investments. Any additional support is likely to result in strengthening of linkages between the state and the company, as set out in Fitch's Parent Subsidiary Linkages criteria and is likely to result in a rating upgrade.

Fitch will assess the nature and extent of support from the state, including the continuation of support over the medium to long term, in determining the linkages and consequently the extent of notching. If state support is provided via equity contribution and extension of project debt, 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 currently benefits from its moderate linkages with the sovereign, resulting in a one-notch uplift from its Standalone Credit Profile of 'a-(idn)'. The standalone credit assessment of 'a-(idn)' 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

Moderate Linkages with Sovereign: We currently assess the linkages between Geo Dipa and the Indonesia state as moderate, under the Parent and Subsidiary Rating Linkage criteria. The state owns 93.3% of Geo Dipa directly via the Ministry of Finance, appoints its boards of directors and commissioners and has strong influence over the company's investment, strategy and operations decisions. The state provided tangible support for power plant development through equity injections of IDR607 billion in 2016.

The company expects the government to support its proposed phase 2 expansion of its two operating plants at Dieng and Patuha. Geo Dipa says the state has approved equity injections equivalent to 25% of the project cost and is also likely to provide support for the proposed project debt.

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 to over 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 its stable operating metrics over the next 18-24 months on the back of its consistent plant maintenance. Geo Dipa's average availability factor and capacity factor is expected to remain above 90% (2018: 95%) and 80% (2018: 80%), respectively, over the medium term. The PPAs require Geo Dipa to maintain its availability factor above 75% at its Patuha units and 50% at the Dieng units to be eligible for capacity payments under the PPAs, which the company has historically been able to achieve.

Small Scale; Concentrated Operations: Geo Dipa has 120 MW of capacity with two operating plants, which results in high asset concentration. The proposed expansion will add to the 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, which includes damage to property and business interruption loss.

Large Expansion Plan: Geo Dipa expects to double its capacity to 260 MW by 2023. The company plans to add a second unit at its Dieng and Patuha power plants. Other investments include an additional binary power plant and a small-scale power plant, both 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 the majority 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 given the large capex, which is likely to be largely debt funded. We estimate Geo Dipa's FFO adjusted net leverage to weaken to around 4.0x by 2021 (2018: 0.5x) and peak at around 8x in 2022-2023. We expect leverage to fall below 5.5x only from 2024, once the new capacity starts full-fledged operations, in light of 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: Fitch believes Geo Dipa's funding will remain comfortable even though the investments are large relative to its current operations, because of its long-term PPAs that cover the proposed capacity, and its status as a state-owned enterprise. Management estimates the proposed expansion will require investment of around IDR7 trillion compared with its 2018 EBITDA of IDR470 billion.

Geo Dipa plans to fund 70% of the cost through debt and is in the process of finalising a loan with a multilateral institution. Its small-scale power plant will be funded by a IDR270 billion loan from sister company PT Sarana Multi Infrastruktur (Persero) (SMI, AAA(idn)/Stable).

Derivation Summary

Geo Dipa's rating is one notch above its Standalone Credit Profile (SCP) of 'a-(idn)' to take into account its linkages with the Indonesian government. Its SCP is well-positioned relative to national peers, such as PT Aneka Gas Industri Tbk (Aneka Gas; A-(idn)/Stable) and PT Astra Otoparts Tbk (AUTO; AA-(idn)/Stable). The RWP reflects the likelihood of stronger support from its parent.

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 50%. Aneka Gas also has an aggressive capex programme that results in negative free cash flows and high leverage (FFO net adjusted leverage more than 3.0x). Geo Dipa maintained positive FCF with leverage of around 1.0x at end-2018, but we expect its upcoming investments to increase its leverage, which will only normalise after reaching 8x at the peak of its investment cycle. As a result, Fitch assesses the two companies' credit profiles at a similar level.

AUTO's rating also receives one-notch uplift due to its moderate linkage with its parent, PT Astra International Tbk (Astra). This moderate linkage is demonstrated through Astra's broad presence and influence, business integration into Astra's automotive value chain as a supplier of automotive components in the original-equipment-manufacturer and replacement markets, the shared Astra brand and tangible support when Astra acted as a standby buyer to AUTO's IDR3 trillion rights issue in 2013. This is comparable with the government's control over Geo Dipa's business and support for its investment.

AUTO's stronger SCP reflects its lower EBITDA margin (around 6%), which is counterbalanced by its larger operating scale, its role as a market leader in the automotive-supplier segment and strong financial profile, which we expect to continue. In comparison, Geo Dipa benefits from stronger and more stable cash flows, but we expect its financial profile to deteriorate as it is entering an investment phase. This explains the two-notch rating difference between the two companies. (ends)