Moody's assigns first-time Baa3 issuer and bond rating to Pertamina Geothermal Energy; outlook stable

(Singapore, April 17, 2023) -- Moody's Investors Service has assigned a first-time issuer rating of Baa3 to PT Pertamina Geothermal Energy Tbk (PGE).

At the same time, Moody's has assigned a Baa3 senior unsecured rating to the proposed USD denominated bonds to be issued by PGE. The proceeds from the bonds will be used primarily to refinance the company's bank loans and for other general corporate purposes.

The bonds will represent a senior unsecured obligation and rank equally with all of PGE's existing and future unsecured and unsubordinated debt.

The outlook on the ratings is stable.

RATINGS RATIONALE

PGE's standalone credit profile reflects (1) the company's market position as one of Indonesia's leading independent geothermal power producers; (2) its stable cash flow from its operating plants, supported by long-term power purchase agreements (PPAs) and steam sales contracts (SSCs); (3) its dependence on the continuous supply of steam resources; (4) Indonesia's (Baa2 stable) evolving policy and regulatory framework for renewable energy; and (5) the risk associated with PGE's expansion plans and the company's moderate financial leverage.

The Baa3 issuer rating incorporates a one-notch uplift to PGE's Ba1 standalone credit profile, reflecting Moody's expectation that Pertamina (Persero) (P.T.) (Pertamina, Baa2 stable), which currently owns an indirect 75% stake in PGE, will provide support to the company in times of stress.

Given that the proposed USD bonds rank pari passu to all of PGE's existing and future unsecured and unsubordinated debt, the Baa3 rating on these bonds is in line with its issuer ratings.

PGE has long-term take-or-pay PPAs and SSCs with PLN (Persero) (P.T.) (PLN, Baa2 stable), which provide long-term cash flow visibility. The rating also factors in PGE's relatively stable operating track record, underpinned by a capacity-weighted load factor of 84%-87% over 2020-22, compared with around 85% (on an average) take-or-pay levels. At the same time, rating is constrained by PGE's dependence on the continuous supply of steam resources, and Indonesia's evolving policy and regulatory framework for renewable energy.

PGE faces a degree of resource risk because of the natural decline of geothermal steam wells and will need to drill new make-up wells while raising production from existing wells. This gives rise to variability in both the rate of decline across the steam wells and the company's success in developing new steam production from its drilling campaign.

However, PGE has extensive experience in these areas, which support its ability to design and implement its scheduled drilling program over time.

The rating also considers the execution risk and financing needs associated with PGE's future expansion. PGE plans to substantially grow its geothermal capacity to 1,272 megawatts (MW) by 2027 from 672 MW in 2022. Of the 600 MW in planned capacity additions, PGE has secured PPAs for 165 MW in capacity, but remains in the early stages of exploration and feasibility studies with no PPAs signed yet for the remaining 435 MW in capacity.

Moody's expects PGE's financial leverage to trend higher over the next 3 years, primarily driven by additional debt to fund its new development commitments. Its cash flow metric, as measured by consolidated cash flow from operations pre-working capital (CFO pre-WC)/debt will decline from a high of 24% to 15% over this period.

The Baa3 issuer rating incorporates one notch of uplift to reflect the likely extraordinary support PGE will receive from Pertamina when needed. Pertamina indirectly owns a 75% stake in PGE through its subsidiaries, PT Pertamina Power Indonesia (PPI) (69%) and PT Pertamina Pedeve Indonesia (Pedeve) (6%).

PGE is Pertamina's primary platform for the renewable electricity generation segment and has strong operational and strategic linkages with Pertamina. Although PGE is currently a relatively small step-down subsidiary of Pertamina, its importance to the parent is increasing as it implements its energy transition plans.

Pertamina has demonstrated funding support for PGE's expansion program, by providing a $602 million shareholder loan in 2012. The one-notch uplift also factors in Pertamina's letter of strategic support to PGE dated 6 August 2022. Pertamina has committed to ensure all the entities under its Group are able to fulfill and service their obligations and that it will continue to provide PGE with the necessary support directly or indirectly.

In terms of environmental, social and governance (ESG) factors, PGE is renewable energy company and benefits from the positive macroeconomic and sectoral trends in renewable energy. The company is, however, exposed to high physical climate risk, and its operations have been impacted by landslides in the past. 

The Baa3 rating factors in moderate governance risk, given PGE's concentrated shareholding by Pertamina, which allows the parent to exert significant influence on the company's strategy and operations.

RATIONALE FOR STABLE OUTLOOK

The stable outlook reflects Moody's expectation that PGE's PPAs and SSCs will not undergo material adverse changes in the near to medium term and that PGE will be able to execute its capital spending programme without major delays or cost overruns.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Upward rating momentum is unlikely over the next 12-18 months, considering PGE's business profile and financial strategy. Nonetheless, Moody's could upgrade the rating over time if PGE maintains a (CFO pre-WC)/debt of above 17% on a sustained basis.

The rating could come under downward pressure if (1) PGE's credit profile deteriorates on a sustained basis, potentially because of weaker operational performance, a delay in the commissioning of new projects, or aggressive acquisitions and capital spending beyond Moody's expectations; (2) Pertamina's credit quality materially declines or support from Pertamina weakens, for example as reflected by a significant decrease in the parent's effective shareholding in PGE; (3) the terms and conditions of the PPAs for under construction and future capacity are significantly different from the existing PPAs; (4) there is significant change in overall off-taker profile of PGE or (5) PGE's (CFO pre-WC)/debt falls below 11%-12% on a sustained basis.

The principal methodology used in these ratings was Unregulated Utilities and Unregulated Power Companies published in May 2017 and available at https://ratings.moodys.com/api/rmc-documents/75129. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.

PGE is an Indonesia-based geothermal independent power producer (IPP) that generates steam and electricity using geothermal resources. As of 31 March 31 2023, the company either directly or indirectly had rights to 13 geothermal working areas, with a total installed capacity of 1,877 MW, of which 672 MW is operated by PGE and 1,205 MW operated by joint operating contractors.

Of PGE's total operational capacity, 51% (340 MW) is dedicated to steam supplied to power plants owned by PLN (Persero) (P.T.) (PLN, Baa2 stable) under steam sales contracts (SSC), while the remaining 49% (332 MW) is under an integrated business model, with generated electricity sold to PLN under power purchase agreements (PPAs).

PGE is listed on the Indonesia Stock Exchange and Pertamina indirectly owns a 75% stake in PGE through its subsidiaries, PT Pertamina Power Indonesia (PPI) (69%) and PT Pertamina Pedeve Indonesia (Pedeve) (6%). (ends)