TRIS Rating has assigned the rating of “BBB+” to the proposed issue of up to Bt6,500 million in senior unsecured debentures of EDL-Generation Public Company (EDL-Gen). At the same time,
TRIS Rating has affirmed the company rating of EDL-Gen at “BBB+”. The outlook remains “stable”. EDL-Gen plans to use the proceeds from the new debentures for business expansion. The ratings reflect the credit profile of the company’s major shareholder and sole electricity off-taker, Electricite du Laos (EDL), whose credit profile as a state enterprise is underpinned by that of Lao People's Democratic Republic (PDR). EDL-Gen’s ratings take into consideration the company’s strong market position in Lao PDR’s power generation sector and adequate capital structure to support business expansion. The ratings are partially constrained by the sovereign profile of Lao PDR, EDL’s funding needs for power network investments, and exposure to hydrology risks. The “stable” outlook reflects an expectation that the business model and integration of EDL and EDL-Gen will remain unchanged. EDL-Gen is expected to expand its business as planned and generate strong cash flows. EDL is expected to hold a majority stake in EDL-Gen and receive continuing sovereign supports. In addition, Lao PDR’s fiscal positions and trade accounts are expected to improve over the medium term.
EDL-Gen was founded in 2010 and was listed on the Lao Securities Exchange in 2011. The incorporation of EDL-Gen was part of the power sector restructuring in Lao PDR, which required EDL-Gen to purchase existing power generation business and future generation assets from EDL. Before the set up of EDL-Gen, EDL was the sole domestic power generator, transmission provider, and distributor to end-users in Lao PDR. EDL also owned shares in certain independent power producers (IPPs) operated in Lao PDR. After the restructuring, EDL continues to be the single wholesale electricity buyer and the owner of almost all the power grid in Lao PDR.
As of September 2014, EDL held a 75% stake in EDL-Gen. EDL-Gen owns and operates hydropower assets developed by EDL, as well as invests in shares of hydropower IPPs previously held by EDL. Each of EDL-Gen’s owned assets was granted power purchase agreement (PPA) and concession for 30 years. As of September 2014, EDL-Gen’s total electricity capacity was 881 megawatt (MW), divided into 387 MW from seven owned assets and 494 MW from investments in four IPPs.
EDL-Gen’s credit profile reflects that of EDL since EDL has a majority stake and high integration with EDL-Gen in terms of power off-taker, business growth potential, future PPA structure, and dividend policy. EDL is the only power off-taker for and the owner of the power grid connected to all of EDL-Gen’s existing and potential future owned assets.
The credit quality of EDL is underpinned by a very high likelihood that the government of Lao PDR will provide full support to EDL in stress events. This is supported by the critical roles of both EDL and EDL-Gen in Lao PDR’s power development plan, and the importance of the power sector in promoting the country’s economic and social developments. EDL is also wholly owned by the Ministry of Finance (MOF) of Lao PDR.
EDL-Gen’s rating reflects the company’s leading role and strong competitive position in Lao PDR’s power generation sector. The company is the second largest power generator with 30% share in total installed capacity, and the largest generator with 50% share in domestic supply capacity. The rating also considers a visible and solid growth potential for EDL-Gen to expand its generating capacity from 881 MW in 2013 to 2,423 MW by 2020.
The rating also considers the challenges facing Lao PDR in developing and improving institutional framework and operating environment, as well as managing public debt level. The International Monetary Fund (IMF) estimated the country’s foreign-currency public debt at 47% of gross domestic product (GDP) in 2013. The IMF estimated the country’s debt ratio to be under pressures from fiscal and current account deficits for the next one to two years before the ratio gradually improves.
EDL-Gen’s financial profile is strong. Revenues during 2011-2013 were in a range of Bt3-Bt3.5 billion. The operating margins (operating income before depreciation and amortization as a percentage of revenue) have been quite steady in a range of 86%-89%. At the end of June 2014, EDL-Gen’s debt to capitalization was exceptionally strong at 12.8%.
During 2014-2020, TRIS Rating’s base-case expects EDL-Gen’s revenue to grow on average at 13% per annum. Operating margins are expected to stay at least above 80%. Funds from operations (FFO) are expected to grow at 5% per annum. Slower growth rates in the FFO reflect higher interest costs from expected leverage-driven investments. TRIS Rating views EDL-Gen’s balance sheet as adequate to support the company’s growth profile. The capital expenditures are expected at about Bt5.5-Bt6 billion per annum. The dividend payouts are expected at about Bt2-Bt3 billion per annum. The debt to capitalization ratio is expected to rise markedly, but will not exceed 65%, or interest-bearing debt to equity ratio below 1.8 times, throughout the growth plan by 2020.
EDL-Gen’s liquidity profile is expected to remain moderate. Cash flow protections are expected to stay at strong level, but currency mismatch between inflows and debt service, as well as limited track record in capital market constrained the profile. The FFO to total debt ratio is expected to stay above 10% on average. The EBITDA (earnings before interest, tax, depreciation, and amortization) interest coverage ratio is expected to stay above 3 times.
In a downside scenario, TRIS Rating assumes delays in the completions of new projects and operating margins at 70%. EDL-Gen’s revenue will be 15% lower than the base-case. FFO will be 30% lower. The debt to capitalization will rise to about 70%. TRIS Rating views the likelihood of the downside scenario as low. The financial profile has adequate cushion to support the downside risk.
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