TRIS Rating has assigned the company rating of SouthEast Asia Energy Ltd. (SEAN) at “A-” with “stable” outlook. The rating reflects the stable cash flows from its long-term power purchase agreement (PPA) with the Electricity Generating Authority of Thailand (EGAT) and the experience of its shareholders and management in hydroelectric power plants. The rating also takes into consideration the structural protection embedded in the project contracts. However, the rating is constrained by the unpredictability of the water flow in the Nam Ngum river, SEAN’s limited operating track record, and the sovereign risk of Lao PDR, where SEAN’s sole operating assets are located. The “stable” outlook reflects TRIS Rating’s expectation that SEAN will continue to receive stable cash flows from the power plants. The power units and water flows are expected to be well managed, enabling SEAN to achieve the Annual Supply Targets in both wet and dry years.
SEAN is a power holding company of the CH. Karnchang Group (the CK Group). It was established in Thailand in 2004 to develop and invest in hydro-electric power projects in the Southeast Asian region. Currently, SEAN holds 75% interest in the Nam Ngum 2 Hydro-electric Power Project (NN2HPP) in Lao PDR. The rest (25%) is held by EDL-Generation Public Company (EDL-Gen), a subsidiary of Electricite du Laos (EDL), a state-owned enterprise of the Laos government. NN2HPP has an installed capacity of 615 megawatts (MW) and has a 25-year PPA, after the commercial operation date (COD), to sell 100% of the electricity it generates to EGAT. It also has a build-own-operate-transfer (BOOT) concession from the government of Laos. The project commenced operation in March 2011.
SEAN’s major shareholders comprise CK Power PLC. (CKP; 56.0%) and Ratchaburi Electricity Generating Holding PLC (RATCH; 33.3%). CKP is an energy holding company in the CK Group. Currently, CKP is in the process of listing on the Stock Exchange of Thailand. The CK Group has many lines of businesses, covering engineering and construction (E&C), infrastructure, and utilities. RATCH, which is 45.0% owned by EGAT, is the largest group of private power producers in Thailand, with an aggregate power generating capacity of 5,313 MW.
The NN2HPP is located on the Nam Ngum river, 90 kilometers (km.) from Vientiane, the capital city of Lao PDR, and 35 km. upstream of the 150-MW Nam Ngum 1 dam. The construction was completed on time and within the budget of approximately Bt31,000 million. The project is operated by EGAT under a 27-year operation and maintenance (O&M) agreement subcontracted from RATCH-Lao Service Co., Ltd., the main O&M contractor for the project. EGAT has extensive experience and expertise in operating hydro-electric plants in Thailand. With EGAT engaged in the NN2HPP, the operational risk should be mitigated to a significant extent. In the first quarter of 2013, the plant availability was high at 99.0%, while it was 96.5% in 2012 and 97.2% in 2011.
Under the concession agreement, the NN2HPP has the right to use the water in the Nam Ngum river to generate electricity. The project will also be granted an exclusive lease of the site, including the land, the reservoir, and the right of way for access roads and transmission lines. In addition, the project has the right to receive and hold its revenue outside Lao PDR, including dividends and payments owed to project creditors. The project is obliged to pay a royalty fee and corporate income taxes to the government of Laos, as specified in the concession agreement. The project is also required to implement environmental management and social development plans for affected stakeholders, in accordance with international standards.
Under the take-or-pay structure of the PPA, EGAT has an obligation to buy up to a total of 2,310 gigawatt hours (GWh) of electricity from the project every year, depending on the water availability in the reservoir. The project has an obligation to maintain the plant availability at a minimum of 10 hours per day, equivalent to approximately 1,722 GWh per annum or 77% of the total Annual Supply Target. Electricity output is subject to the amounts of the rainfall and water inflow into the reservoir, both of which are unpredictable. The PPA contains an excess or shortage mechanism to stabilize the project’s cash flows. The mechanism allows the project to sell more electricity than the Annual Supply Target in wet years and then receive compensation for that excess amount in dry years, when electricity production falls below the Annual Supply Target.
In 2011, the amount of water flowing from the Nam Ngum river into the project reservoir was exceptionally high at 8,778 million cubic meters (mcm), 40% higher than the historical annual average of 6,270 mcm recorded during 1949-2003. As a result, NN2HPP declared it generated 2,780 GWh of electricity to sell to EGAT, higher than the pro-rata Annual Supply Target of 1,778 GWh for 2011. Under the terms of the PPA, the project could sell 2,433 GWh of electricity to EGAT in 2011. Therefore, the rest of the electricity NN2HPP generated, or 347 GWh, was accumulated in the energy account to be used in the future when experiencing water shortage situation.
In 2012, the water volume of 5,858 mcm flowing into project reservoir was 6.6% lower than the historical average. The project declared it generated 2,180 GWh of electricity, below the Annual Supply Target of 2,310 GWh. However, NN2HPP could sell 2,421 GWh by redeeming 241 GWh of electricity from the energy account. The use of the cumulative energy account helps stabilize the project’s cash flows even the actual amounts of power generated are lower than the Annual Supply Target. As of December 2012, there was 106 GWh of electricity left in the energy account, serving as a cushion for any dry year.
SEAN’s current performance was mainly derived from the NN2HPP project. SEAN’s revenue for 2011-2013 has been 100% generated from NN2HPP. In 2012, SEAN recorded revenues of Bt3,838 million. Earnings before interest, tax, depreciation, and amortization (EBITDA) was Bt3,108 million in 2012. Profitability was strong, as the operating margin before depreciation and amortization was 78.7% in 2012. This high level is similar to the margin of other hydro-power plants, because hydro-power plants have no fuel cost and the operating expenses are fixed. For the first quarter of 2013, SEAN’s revenue was Bt961 million, accounted approximately 25.0% of expected revenue for the full year 2013. EBITDA was Bt745 million for the first three months of 2013. The operating margin before depreciation and amortization was high at 77.5%.
SEAN’s financial risks are moderate. The tariff and funding structures of the project leave SEAN exposed to some foreign exchange risk. The project receives its electricity tariff payments of 50% in Thai baht and 50% in US dollars. However, the project’s financing structure comprises 70% in Thai baht denominated loans and 30% in US dollar denominated loans. The company’s offshore accounts in Thailand eliminate money transfer risk. The company continues to be exposed to interest rate risk because the interest rate on the project loan is based on a floating rate linked with the minimum lending rate (MLR) for the Thai baht loan, and linked with LIBOR (London Interbank Offered Rate) for the US dollar loan.
SEAN’s debt obligations carry structural protections. All lenders have a first mortgage lien on all the project’s assets, a pledge of the project’s major contracts, and pledges for all operating and debt service accounts. Every year, the project submits an operating budget for lenders’ approval. The use of the cash generated by the project is restricted to specific purposes through the employment of various reserve accounts. The specific purposes include servicing the operating and financial obligations, including a six-month debt service reserve account. Any excess cash in these accounts must be used to prepay debt for 20% of that excess, before any dividends can be paid. This mandatory prepayment will improve SEAN’s debt service ability during the last two years of the repayment schedule. The average debt service coverage ratio (DSCR) for the NN2HPP is projected at 1.21 times throughout the life of the loans.
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