TRIS Rating Co., Ltd. has affirmed the company rating of National Power Supply PLC (NPS) at “BBB” and has affirmed the ratings of NPS’s senior debentures at “BBB-“. 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) under the Small Power Producer (SPP) scheme, and an experienced management team from Double A (1991) PLC (DA). The ratings are partially offset by some related party transactions, the ongoing restructuring efforts within the group, along with the large capital expenditures required to add 823 megawatts (MW) in new power generating capacity and expansions in many businesses. NPS’s ratings are constrained by the “BBB” company rating assigned to DA. DA and its shareholder held 36.2% of the outstanding shares of NPS as of July 2012. The “stable” outlook reflects TRIS Rating’s expectation that NPS will continue to receive reliable cash flows from its existing power plants. Its financial profile will improve after the returns from new investments are gradually realized. The ongoing organizational restructuring is expected to be completed very soon while the group’s related-party transactions should be minimized to the lowest possible level.
TRIS Rating reported that NPS is the leading operator of biomass power plants in Thailand. Since 2010, DA and NPS have reorganized the structure of NPS and the group in DA in order to position NPS as the flagship power company of the DA Group. NPS purchased six biomass power plants from companies in the DA Group at total cost of Bt4,378 million. These six plants are biomass-fired power plants. Including acquired plants, NPS currently owns and operates eight coal and biomass power plants under the SPP scheme with a total capacity of 493 MW and 880 tonnes of steam. The power plants of NPS and its subsidiaries are located in Prachinburi and Chachoengsao provinces. In addition to its interest in the power sector, NPS expands its business scope to energy-related businesses and other businesses. NPS’s investments include Double A Ethanol Co., Ltd., which produces ethanol from cassava with a production capacity of 500,000 litre per day. NPS has also invested in NPS Ocean Star Co., Ltd., a coal transportation service provider, and Inter Stevedoring 5 Co., Ltd., which offers floating crane barge services to facilitate coal transportation. In addition, NPS owns an industrial water provider in the 304 Industrial Park (304IP), a rice bran oil producer, and a research and development firm. NPS also acquired the rights to operate a coal mine in Indonesia worth Bt396 million. In 2011, the power segment remained NPS’s major source of revenue and earnings before interest, tax, depreciation and amortization (EBITDA). About 90% of total EBITDA came from the power business while 5% came from industrial water sales and 5% from laboratory research services.
TRIS Rating said, about 62% of NPS’s electricity generating capacity is secured under 25-year PPAs with EGAT. The remaining electricity and the steam output is supplied to DA under long-term contracts and sold to customers in the industrial estates in Prachinburi and Chachoengsao. The power plants are designed to run on coal and biomass. Biomass fuel plant provides a cost advantage and offers flexibility in fuel selection. However, a biomass fired power plant requires higher maintenance and the fuel causes more deterioration of equipment and parts, compared with coal-fired and gas-fired plants.
In the first half of 2012, the performance of power segment was flat compared with the same period last year. One of NPS’s major generating units was shut down for major overhaul for about 1.5 months in the first half of 2012. However, the increase in tariff rate of EGAT offset the drop in the volume of power produced. Thus, NPS’s total revenues was flat at Bt5,397 million in the first six months of 2012. The operating margin before depreciation and amortization ratio improved slightly to 24.5% in the first six months of 2012 compared with 23.7% in the first half of 2011. The profitability improved because of the higher selling price to EGAT and steam price while most fuel cost, especially coal cost, stayed tame. Despite better profitability, EBITDA was relatively flat at Bt1,287 million through June 2012. An equity loss of Bt56 million from Kanna Co., Ltd. pulled down the earnings for the first six months of 2012. The total debt to capitalization ratio deteriorated to 57.3% as of June 2012, from 52.1% at the end of 2011. NPS issued new debentures worth Bt3,000 million in the second quarter of 2012, which pushed up debt to capitalization ratio. The EBITDA interest coverage ratio was relatively flat at 3.8 times in the first six months of 2012. ?
Going forward, NPS’s profitability is expected to improve. The cost of coal, which accounts for 35%-40% of NPS’s total power production cost, has remained low. In addition, the rise of Bt0.48 per kilowatt hour (kWh) in the fuel transfer (Ft) will be in effect for the fourth quarter of 2012 and may be through 2013. However, the ethanol project may squeeze profit margin. The first phase of NPS’s ethanol project will start up by the end of 2012. The domestic ethanol is encountered with oversupply situation while the price of cassava, the raw material, was pushed higher due to a government’s crop-pledging policy. The crop price distortion makes the ethanol produced from cassava further less competitive than ethanol made from molasses.
Leverage of NPS is expected to remain moderately high during the next few years. NPS has committed to capital expenditures totaling Bt35,000 million over the next five years. These budgets will be spent on maintenance and expansion. The expansion plan includes one coal-fired plant under independent power producer (IPP) scheme, two SPP plants using biomass fuels, one ethanol plant, an expansion of NPS’s industrial water business, promotion of energy-tree plantation, and an expansion to mining business. The two new SPP plants are planned to start operation in 2014 and 2015, respectively. The IPP project is in the process of Environmental and Health Impact Assessment (EHIA) study and the project is expected to be completed by 2016-2017, four years later than original plan, due partly to the implementation of new regulation arising during the early stage of the project.
TRIS Rating has a concern about NPS’s related party transactions. A subsidiary of NPS has lent a Bt1,718 million cash surplus to three related companies at an annual 7.2% interest rate. During the past several years, National Power Supply IPP Co., Ltd. (NPSIPP), a wholly-owned subsidiary of NPS, entered land purchase agreement with a related company to buy 2,020 rai of land, worth totaling Bt2,568 million. The land would be used to build an IPP power plant. NPSIPP paid a deposit of Bt2,422 million for this transaction. The land purchase price is well above the appraised value of Bt1,041 million set by an independent appraiser. However, the land purchase agreement has a condition that the purchase area and land price will be finalized after all permits and PPA have been approved. The final price will be based on the latest appraised value according to the agreements. NPSIPP also bought 807 rai of land from a related party at a cost of Bt1,077 million as an alternative site for the IPP power plant. However, an independent appraiser valued the land at only Bt41 million. The difference was recorded as a reduction in NPS’s equity, said TRIS Rating. — End
Company Rating: Affirmed at BBB Issue Ratings: NPS145A: Bt3,000 million senior debentures due 2014 Affirmed at BBB- NPS156A: Bt3,000 million senior debentures due 2015 Affirmed at BBB- Rating Outlook: Stable
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