TRIS Rating has affirmed the company rating of National Power Supply PLC (NPS) at “BBB” and has affirmed the ratings of NPS’s senior unsecured debentures at “BBB-”. The outlook remains “stable”. The ratings reflect the reliable cash flows from NPS’s long-term Power Purchase Agreements (PPA) with the Electricity Generating Authority of Thailand (EGAT) under the Small Power Producer (SPP) scheme and long-term contracts with Double A (1991) PLC (DA). The ratings are partially offset by NPS’s high level of leverage and its periodic related party transactions. NPS’s ratings are constrained by the “BBB” company rating assigned to DA, which held 36.2% stake of NPS as of November 2014. The “stable” outlook reflects TRIS Rating’s expectation that NPS will maintain its smooth operating performance and receive reliable cash flows from its power plants. TRIS Rating expects the company to maintain its cash flow protection and appropriate capital structure when pursuing its growth strategy.
NPS is the leading operator of biomass power plants in Thailand. Since 2010, DA and its affiliates (DA Group) and NPS have been reorganizing the structure of the Group. The reorganization positions NPS as the flagship energy company of the DA Group. NPS currently owns and operates a total of nine biomass-fired and coal-fired power plants under the SPP scheme. The nine plants have a total capacity of 503 megawatts (MW) of electricity and 1,180 tonnes per hour of steam. The power plants owned by NPS and its subsidiaries are located in industrial parks in Prachinburi and Chachoengsao provinces. In addition to producing electricity, NPS has expanded its scope to encompass energy-related businesses and supporting businesses in order to secure its fuel supplies and reduce costs. NPS’s subsidiary makes ethanol from cassava, producing up to 500,000 liters per day. NPS’s subsidiary produces rice bran oil and sold industrial water for industrial users. NPS’s supporting businesses include a firm which promotes the planting of eucalyptus trees (energy tree) for use as a renewable fuel source, and a research and development company. NPS acquired the rights to operate a coal mine in Indonesia. NPS also provides transportation services for coal and biomass including floating crane barge services. However, the power segment remains NPS’s major source of revenue and earnings before interest, tax, depreciation and amortization (EBITDA). In 2013 and the first nine months of 2014, about 85% of NPS’s total EBITDA came from the power segment while 15% came from other businesses.
About 60% of NPS’s electricity generating capacity is secured under 25-year PPAs with EGAT. The remaining amount of electricity and the steam output are 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. A biomass-fueled plant yields a cost advantage for the operator and offers flexibility in the choice of fuel. However, a biomass-fired power plant requires higher maintenance and the fuel causes more deterioration in the equipment, compared with coal-fired and gas-fired plants.
NPS’s plant performance was smooth in the first nine months of 2014. Forced outages were 4.9%, compared with 3.9%-5.3% during 2011-2013. Average plant availability improved to 88.6% of total available hours in the first nine months of 2014, from 83.3%-87.5% during 2011-2013 because there was no major overhaul at any of its large power plants like it occurred in 2013. The planned shutdown time reduced to 6.6% of total available hours in the first nine months of 2014, compared with 8.6%-11.5% during 2011-2013.
NPS’s profitability and net profit continued to improve in the first nine months of 2014, mainly on the back of a higher electricity tariff rate and falling coal prices. The Japanese Power Utility Index (JPU), a widely used index for coal prices, declined from US$110.83 in 2012, to US$94.06 in 2013, and US$81.79 in the first nine months of 2014. NPS also lowered its fuel cost by replacing some high calorific value coal with low calorific value coal after it made some boiler modifications and used more low-cost biomass fuel to reduce its fuel cost. The operating margin before depreciation and amortization remained healthy at 29.1% in the first nine months of 2014, compared with 31.2% in the same period of 2013. EBITDA rose to Bt3,389 million in the first three quarters of 2014, a 12.3% rise over the same period of the prior year. Total debt continued to increase, climbing to Bt18,351 million as of September 2014, from Bt16,771 million in 2013 because of its ongoing expansions. NPS is building two new power plants, with a total capacity of 223 MW, and a new production line at its ethanol plant. NPS paid total dividends of Bt1,075 million in the first half of 2014, a payout ratio over 80%. As a result, the total debt to capitalization ratio remained high at 63.3% as of September 2014, compared with 64.4% at the end of December 2013. The increase in total debt also resulted in flat EBITDA interest coverage ratio at 4.2 times in the first nine months of 2014, compared with 4.1 times in 2013 even though EBITDA rose. The funds from operations (FFO) to total debt ratio was at 17.7% (annualized from the trailing 12 months) in the first nine months of 2014, the same level as in 2013.
NPS had outstanding deposit for land purchase with related companies totally Bt1,615 million as of December 2012. In 2013, NPS had a plan to build combined-cycle power plants in Prachinburi and Chachoengsao provinces. To build new combined cycle power plants, NPS, via its subsidiaries, entered the land purchase agreement to acquire 288 rai of land, close to PTT PLC’s fourth gas transmission pipeline, from three related companies in 2013. The land cost Bt624 million. NPS paid Bt605 million as a deposit. As of September 2014, the outstanding deposit for land purchase with related companies was Bt1,694 million in total.
Looking forward, NPS’s profitability in power segment is expected to remain satisfactory in 2014-2015, due to the relatively low coal costs. Coal costs, which accounted for about 30% of NPS’s power production cost, are expected to remain low. NPS’s revenues will be driven by two new power plants, which are expected to start commercial operation in the first half of 2015. Upward pressure on NPS’s leverage is expected to ease after its sizeable investments will complete soon and the coal-fired power plant under Independent Power Producer (IPP) scheme is delayed for an extended period. NPS’s challenge will be on the ethanol business. NPS’s second ethanol production line with production capacity of 250,000 litres per day is planned to start up in the first half of 2015. Demand for ethanol rose rapidly during 2012-2013 after the government banned the sale of ULG91. However, current ethanol demand of 3.4 million litres per day is still lower than the current industry capacity of 4.2 million litres per day, excluding 1.4 million litres per day during construction, according to the Department of Alternative Energy Development and Efficiency (DEDE).
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