TRIS Rating Co., Ltd. has affirmed the company rating of National Power Supply PLC (NPS) at “BBB”. At the same time, TRIS Rating has assigned the rating of “BBB-’’ to NPS’s proposed issue of up to Bt3,000 million in senior debentures. The outlook remains “stable”. The ratings reflect the reliable cash flow from long-term Power Purchase Agreements (PPA) with the Electricity Generating Authority of Thailand (EGAT) and Double A (1991) PLC (AA) under the Small Power Producer (SPP) scheme, an experienced management team from the AA Group, and a recent capital injection of approximately Bt6,000 million from its major shareholders. The ratings are partially offset by the large capital expenditure required for investing in the power generating capacity totaling 800 megawatts (MW), and investment in ethanol business. NPS’s ratings are constrained by the “BBB” company rating of AA which held 36% of the outstanding shares of NPS as of March 2011.
The “stable” outlook reflects TRIS Rating’s expectation that NPS will continue to receive reliable cash flows from its existing power plants. The promising demand for ethanol and the long experience of the AA Group in the cassava industry will alleviate the supply risk in the ethanol business.
TRIS Rating reported that NPS is the leading operator of biomass power plants in Thailand. Currently, the company owns and operates five mixed fuel power plants with a total capacity of 435 MW and 600 tonnes of steam under the SPP scheme. With its proven track record of operating biomass-mixed fuel power plants, NPS has been awarded a number of SPP licenses and an Independent Power Producer (IPP) license from the government. NPS was awarded the total power generating capacity of 800 MW. The power plants of NPS and its subsidiaries are located in 304 Industrial Park (304 IP) which belongs to the AA Group. The AA Group serves as NPS’s general maintenance service provider, one of fuel suppliers, and one of its major customers. In 2010, NPS also invested 48% in Kanna Co., Ltd., the joint venture with AA, to promote the biomass plantation. AA has been a major shareholder of NPS since 2010 with a 36% stake as of March 2011; the remaining 64% was held by the ultimate shareholder of AA. The power plants are designed to run on a mix of coal and biomass. Using a mix of biomass fuels, NPS has been able to generate a higher operating margin than operators using conventional fuel, due to the comparatively low cost of biomass and an adder subsidy under SPP contracts. While mixed fuels provide a cost advantage and flexibility in fuel selection, a biomass co-fired power plant causes greater risk of deterioration of equipments and parts.
TRIS Rating said, during 2009-2010, the AA Group has restructured. NPS is now the flagship power company of the AA Group. NPS acquired 100% of the outstanding shares of National Power Plant 5 Co., Ltd. (NPP5) and National Power Plant 11 Co., Ltd. (NPP11), which purchased three power plants from AA at cost of Bt3,774 million in July 2009, or equivalent to Bt34 million per MW. The acquisition was partly funded by bank loans of Bt2,300 million. These two companies operate three 100% biomass-fired power plants under the SPP scheme with total power generating capacity of 107 MW. About 75 MW is secured under three 25-year PPAs. NPS’s total electricity capacity rose to 435 MW after the acquisition from 328 MW formerly. In addition to the acquisitions, NPS also invested in one energy-related company and three support companies plus increased capital in three power subsidiaries. NPS invested a total of about Bt8,200 million during 2009-2010. The new subsidiaries include Double A Ethanol Co., Ltd., producing ethanol from cassava with a production capacity of 500,000 litre per day; NPS Ocean Star Co., Ltd., a coal transportation service provider with 52,000 Dwt capacity; and Inter Stevedoring 5 Co., Ltd., which offers floating crane barge services. NPS gradually increased its paid up capital to Bt9,354 million as of March 2011 from Bt3,386 million as of 2008 to fund these investments.
NPS’s consolidated electricity revenue is secured under four 25-year PPAs with EGAT for 255 MW, a 5-19 years Power Sales Agreement with AA for 74 MW and a 18-year Power Sales Agreement with Biomass Electricity Co., Ltd. to redistribute to customers in 304 IP. The entire steam output is supplied to AA under 19-year and 25-year contracts. After full consolidation with NPP5 and NPP11 in 2010, sales to EGAT contributed about 40% of revenue while sales to AA and industrial customers accounted for 35% and 25%, respectively. Coal, which is the main fuel, constituted about 50% of the total cost in 2009 but declined to 46% of the total cost in 2010 as NPS used more lower-cost biomass as fuel. All biomass fuel, accounting for 10% of total costs, is managed and supplied under long-term contracts by AA and Kanna and Khet Tee Co., Ltd., another AA Group’s company. In 2009 and 2010, in addition to 15-year coal supply agreement with Marubeni Corporation, NPS solidified its coal supply by entering a long-term Coal Purchase Agreement with Glencore International AG (Glencore) and a one-year contract with Noble Resources Pte. The coal prices in the contracts are linked to the Japanese Power Utility (JPU) index. Therefore, approximately 70%-80% of the coal used in 2011 is secured at the price link to the JPU index. This linkage partially mitigates the price risk as it corresponds with the tariff structure in the PPA. However, with floating coal prices, NPS is still exposed to the risk of soaring costs of coal. Any rises in the cost of raw materials cannot be passed through immediately because the Fuel Transfer (Ft) charge may be adjusted more slowly.
TRIS Rating said, in 2010, NPS reported consolidated net profit of Bt1,229 million, up by 55% from 2009. The rise came mainly from a foreign exchange gain of Bt92 million and a reversal of asset impairment of Bt615 million. The operating margin before depreciation and amortization ratio dropped to 27.3% in 2010 compared with 33.7% in 2009. Higher fuel cost attributed to the decline even though NPS has partly alleviated the cost pressure by increasing the use of biomass fuels. Higher maintenance costs, higher standby power charges and higher selling expenses from support companies further depressed the operating margin. The current operating margin level is notably lower than margins of 38%-44% achieved during 2005-2007. NPS reported more stable operating performance after a major overhaul in 2007-2008. NPS experienced higher forced outages of 3.4% of total available hours in 2010 compared with 2.03% in 2009 due to condenser tube problem. However, the outage level improved from 5.2%-7.6% during 2006-2008. Successful implementation of a preventive quarterly short inspection regime and better fuel preparation helped improve operational reliability. Earnings before interest, tax, depreciation and amortization (EBITDA) increased marginally by 3% to Bt2,118 million despite the consolidation of the NPP5 and the NPP11. The EBITDA interest coverage increased to 4.87 times in 2010 from 3.64 times in 2009 because of the drop in financial cost regarding the preferred shares of subsidiary. The total debt to capitalization ratio fell to 43.7% in 2010 from 65% in 2008 due to a huge capital injection of Bt5,600 million during 2009-2010. Funds from operation to total debt ratio increased to 18.2% in 2010 from 15.8% in 2009.
Going forward, NPS’s profitability remains under pressure because the costs of both coal and biomass will follow the rising trend of oil. This cost pressure may be partly mitigated to a certain extent as NPS plans to use more biomass and improve fuel efficiency. NPS’s profitability will be more volatile once the ethanol project starts up in September 2011. The price of ethanol is capped by the government while the price of cassava raw material fluctuates as it is a commodity product. NPS’s capital structure is expected to weaken from the current debt to capitalization ratio of 43.7% as of December 2010. NPS has committed to continue the expansion projects worth totally Bt36,000 million during the next five years. These include a new power plant under the IPP scheme, two SPPs using renewable fuels, and one ethanol plant. The two new SPPs are targeted to start operation in 2013-2014, while the IPP project is expected to be completed in 2015-2016. Once these projects commence, NPS’s total power generating capacity will be 1,235 MW, triple of its current capacity. However, the company’s ability to develop all the projects on time and without weakening its financial profile remains a rating concern, said TRIS Rating. -- End
Company Rating: Affirmed at BBB Issue Rating: Up to Bt3,000 million senior debentures due within 2014 BBB- Rating Outlook: Stable
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