Fitch Upgrades Geo Dipa to 'AAA(idn)'; Outlook Stable

(Fitch Ratings - Jakarta - 05 Dec 2022)-- Fitch Ratings Indonesia has upgraded PT Geo Dipa Energi (Persero)'s (Geo Dipa) National Long-Term Rating to 'AAA(idn)', from 'AA-(idn)'. The Outlook is Stable.

The upgrade reflects the government guaranteeing about 80% of Geo Dipa's debt as of end-September 2022 (end-2021: about 40%). Fitch now equalises Geo Dipa's rating with that of Indonesia (BBB/Stable) based on the single factor of the government guarantee exceeding 75% of total debt under our Government-Related Entities (GRE) Rating Criteria.

Geo Dipa's 'a-(idn)' Standalone Credit Profile (SCP) reflects its long operational history, strong counterparties, stable margins and long-term revenue visibility, balanced against its small operational scale and deterioration in leverage from debt-funded expansion.

'AAA' National Ratings denote the highest rating assigned by the agency in its National Rating scale for that country. This rating is assigned to issuers or obligations with the lowest expectation of default risk relative to all other issuers or obligations in the same country or monetary union.

Key Rating Drivers

Government Guarantees: Geo Dipa's rating is equalised with that of the sovereign under the GRE criteria, with the government guaranteeing over 75% of Geo Dipa's debt. We expect the proportion of government guaranteed debt to remain above 75% over the medium term. Its loan facilities for funding expansion capex from Asian Development Bank (ADB, AAA/Stable) - USD300 million from ADB and USD35 million from ADB Clean Technology Fund (CTF) - are fully guaranteed by the state through PT Penjaminan Infrastruktur Indonesia (Persero) (BBB/Stable) and Indonesia's Ministry of Finance (MoF).

Holding Company Treated as Event Risk: Ministry of State-Owned Enterprises has plans to consolidate the country's geo-thermal operations under one holding company, PT Pertamina Geothermal Energy (PGE). Currently, three state-owned entities or their subsidiaries - PGE, PT Perusahaan Listrik Negara (Persero) (PLN, BBB/Stable) and Geo Dipa - are involved in the geothermal business. However, progress on consolidation has been slow. We also believe the transaction carries significant execution risks, not least on account of entities being under different ministries and differences in asset valuation.

Any change in shareholding of Geo Dipa is likely to result in reassessment of the company's credit profile. Should the state divest the majority of its holding in Geo Dipa, Fitch would no longer apply GRE criteria and the reassessment could result in a multi-notch downgrade of Geo Dipa's ratings. We currently treat any such change in shareholding as an event risk.

Operational Challenges: We estimate Dieng-1's electricity generation to remain low, at under 350 gigawatt hours (GWh) in 2022-2023 (2021: 362GWh, 2020: 391GWh). Geo Dipa's electricity generation declined during 2021 due to lower steam production at its Dieng-1 power plant following a higher-than-expected decline rate at one of its wells. The company expects to complete a make-up well to optimise Dieng-1's steam production by end-2024.

Weakening EBITDA Net Leverage: We expect Geo Dipa's EBITDA net leverage to increase significantly in 2024-2025 as the company executes its expansion plan. Geo Dipa expects to double its capacity to 250MW by 2025, adding a second unit each at its Dieng and Patuha plants (D2P2) and Dieng Binary, with capex of IDR5.6 trillion during 2023-2025 (2022E: IDR1.1 trillion). EBITDA net leverage is likely to increase temporarily well above 5.5x during that period (2021: 0.9x; 2022E: 2.5x). EBITDA net leverage remaining above 5.5x is likely to result in a downward revision of the SCP.

Concentrated Operation, Long-Term Visibility: Geo Dipa has long-term revenue visibility supported by power-purchase agreements (PPAs) with PLN that extend over the next 20 years of its entire output. However, Geo Dipa's operations are highly concentrated, with only two main power plants (Dieng and small scale, Patuha). Nonetheless, this risk is partially alleviated by extensive insurance coverage, including for damage to property and business interruption loss.

'Very Strong' Support Record, Implications of Default: Geo Dipa's support record is assessed as 'Very Strong'. Government support for Geo Dipa has been consistent, given its commitment to increase the country's renewable energy share. Geo Dipa received periodic equity injections in 2015 and 2020 to develop renewable power plants in addition to the guarantee. The high proportion of guaranteed debt drives 'Very Strong' financial implication of default; a default would undermine investor confidence in the state's ability to support other GREs.

We continue to assess ownership and control as 'Strong' and the socio-political implications of default as 'Weak'. Nevertheless, the above do not influence the rating so long as Geo Dipa's government guaranteed debt remains above 75% on a sustained basis.

Derivation Summary

Geo Dipa's rating can be compared with those of PT Pupuk Indonesia (Persero) (PTPI, AAA(idn)/Stable) - the latter is also equalised with the government. Geo Dipa's ratings are equalised with the state's due to our single factor assessment of more than 75% of its debt being guaranteed by the government. On the other hand, PTPI has 'Strong' financial implications of default, given the associated implications for the state's ability to support other GREs due to its status as a subsidy recipient. We assess PTPI's support record as 'Very Strong', as it receives regular direct subsidy allocation based on the annual state budget.

PTPI has 'Very Strong' status, ownership and control, as we expect the company to remain fully owned by the government as the distributor of subsidized fertiliser. PTPI also has 'Very Strong' socio-political implications of default. The failure of PTPI will be detrimental to the distribution of fertiliser, which in turn will affect the wellbeing of 33.4 million farmers and ultimately the country's food security.

Key Assumptions

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

- Electricity generation of 739GWh in 2022, 767GWh in 2023, 793GWh in 2024, and 1,054GWh in 2025 (2021: 814GWh).

- EBITDA margin to remain at around 50% in 2022-2024 (2021: 49%) due to low electricity generation in contrast with stable costs.

- Capex of IDR1.3 trillion in 2022 and IDR1.9 trillion in 2023 (2021: IDR762 million, 9M22: IDR840 million). Capex includes expansion for second units of Dieng and Patuha power plants and maintenance capex.

RATING SENSITIVITIES

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

No positive rating action is possible, as the company is already at the highest level on the national scale.

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

- Negative rating action on the sovereign.

- Weakening likelihood of support from the Indonesian government to Geo Dipa.

- Any material change in Geo Dipa's shareholding structure.

For the sovereign rating of Indonesia, the following sensitivities were outlined by Fitch in a rating action commentary on 28 June 2022:

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

- Public Finances: A material increase in the overall public debt burden closer to the level of 'BBB' category peers, for example, resulting from failure to reduce the fiscal deficit to pre-crisis levels or further accumulation of debt by publicly owned entities.

- Macroeconomic: A weakening of the policy framework that could undermine macroeconomic stability, for instance, resulting from continued monetary financing of the deficit in the next few years.

- External Finances: A sustained decline in foreign-exchange reserve buffers, resulting, for example, from outflows stemming from a deterioration in investor confidence or large foreign-exchange interventions.

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

- Public Finances: A marked improvement in the government revenue ratio in the next few years closer to the level of 'BBB' category peers, including from better tax compliance or a broader tax base, which would strengthen public finance flexibility.

- External Finances: A material reduction in external vulnerabilities, for instance, through a sustained increase in foreign-exchange reserves, a further decline in the dependence on portfolio flows or lower exposure to commodity price volatility.

- Structural: Significant improvement of structural indicators, such as governance standards, closer to those of 'BBB' category peers.

Liquidity and Debt Structure

Adequate Liquidity, Solid Funding Access: Geo Dipa had IDR154.4 billion of readily available cash at end-September 2022, against IDR52.5 billion of debt maturing within one year. 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. It still has available loan facilities from ADB and CTF to fund the second phase of its Dieng and Patuha plants. It has withdrawn USD65.2 million out of its USD300 million OCR facility and USD1.7 million out of its USD35 million CTF facility as of end-September 2022.

Issuer Profile

Geo Dipa is a geothermal energy company. It is a special mission vehicle wholly owned by the Indonesian government through the MoF (94.5%) and PLN (5.5%), a wholly owned GRE. The company's installed capacity is 130MW and it plans to double its capacity by 2025.

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

The ratings of Geo Dipa are directly linked to the credit quality of its parent, the Indonesian sovereign. A change in Fitch's assessment of the credit quality of the parent would automatically result in a change in the rating on Geo Dipa. (ends)