TRIS Rating has assigned the rating of “A+” to the proposed issue of up to Bt2,400 million in senior unsecured debentures of Eastern Water Resources Development and Management PLC (EASTW). At the same time, TRIS Rating has affirmed the company rating of EASTW at “A+”. The outlook remains “stable”. The proceeds from the proposed debenture issue will be used to refinance existing loans for its investment projects. The ratings reflect EASTW’s strength as the sole raw water provider with a comprehensive pipeline network in the Eastern Seaboard area, its low operating risk, the industry's high barriers to entry, and reliable cash flows. However, EASTW’s strengths are partially offset by the large capital investment needed to source additional raw water supply, the unpredictable effects of climate change, and customer concentration risk. The ratings also take into consideration the uncertainty surrounding water resource management regulations that could affect EASTW’s operations.
The “stable” outlook reflects EASTW’s resilient operations and reliable streams of cash. TRIS Rating expects the company to expand through the conservative use of leverage and maintain its well-disciplined monitoring so as to sustain its credit quality. Based on EASTW's current risk profile and the economic condition, any credit action is unlikely over the next 12-18 months. However, any new aggressive debt-funded investments could reduce EASTW's credit quality.
Established in 1992 following a Cabinet resolution, EASTW was given a mandate to be responsible for the development and management of raw water distribution systems in seven provinces in the Eastern Seaboard. Currently, EASTW provides raw water in Chonburi, Rayong, and Chachoengsao provinces, as the commercial activities and residential communities in these areas have continued to expand. EASTW also provides tap water services in 10 service areas with a total production capacity of 308,460 cubic meters (cu.m.) per day. As of May 2015, the major shareholders of the company were the Provincial Waterworks Authority (PWA; owning a 40.2% stake), The Electricity Generating PLC (EGCO; 18.7%), Norbax Inc., 13 (6.8%), and the Industrial Estate Authority of Thailand (IEAT; 4.6%). For the first quarter of 2015, raw water sales accounted for 69% of total revenue, while tap water services represented 24% of the total.
EASTW’s strong business profile is supported by its status as the sole raw water provider in the Eastern Seaboard and its low operating risk. The company initially leased its water pipeline networks from the Ministry of Finance (MOF) and has continually developed its distribution network. At present, EASTW has a fully connected network which enables EASTW to efficiently extract and manage the water it takes from various sources to supply its clients in all its service areas. Although water distribution does not require complicated technology, creating an extensive network does require a significant amount of capital and regulatory approvals which pose a significant barrier to entry. Hence, EASTW is unlikely to face a threat from any large competitor in the raw water segment during the foreseeable future.
Raw water sourcing is another key success factor. EASTW has received approval to extract the raw water from the Royal Irrigation Department's (RID) four reservoirs. In addition, EASTW has continued to find new raw water sources to cope with increasing demand and mitigate the risk of climate change. However, the new sources are subject to RID's approval and tend to incur higher cost due to the farther distance.
EASTW is exposed to customer concentration risk as sales to the PWA and the IEAT, two major shareholders and two key customers, comprised 65%-70% of its total annual sales during the last five years. In addition, the PWA is able to negotiate the raw water tariff and gets discounts from EASTW. In general, the factors that drive demand for raw water are industrial activities in the East and rising consumption by households which are susceptible to economic conditions. High levels of rainfall and the ability of some of EASTW’s customers to source raw water directly also affect the demand. For the first three months of 2015, the gradual recovery of industrial production and tourism activities in the East pushed demand for both raw water and tap water. For the first quarter of 2015, EASTW reported raw water sales volume of 69.1 million cu.m., a 7.8% increase year-on-year (y-o-y). Revenue from raw water sold rose by 7.3% y-o-y to Bt741 million. Revenue rose more slowly than the volume of water sold because a higher proportion of sales were to consumers group which has a lower tariff than other customer groups.
The tap water segment has continued growing. Tap water sales volume rose 10.7% y-o-y to 19.5 million cu.m. Revenue from the tap water segment rose by 13% to Bt256 million. Although demand for tap water has grown steadily, the prospects for expansion are modest since the PWA is not inclined to grant any new concessions or outsource its operations. In order to sustain revenue growth, EASTW has to seek opportunities to get a contact directly from municipalities and attempt to formulate a service model for unserved areas.
EASTW’s financial strength is supported by its proven operating performance and the reliability of its cash flows. For the first three months of 2015, EASTW's revenue was Bt1,079 million, down by 2% y-o-y. However, if revenue from construction under concession agreements is excluded, EASTW's revenue from normal operations grew 14.6% y-o-y to Bt1,064 million. The operating margin (operating profit before depreciation and amortization, as a percentage of sales), excluding the extra item, has stayed above 54% during the past five years. The company's financial profile remains strong, despite a rise in debt during the past two years due to its investment to improve raw water distribution system capacity and to secure its water supply sourcing. The main projects invested are the Tab-Ma pond project and the Prasae-Nong Pla Lai pipeline project. At the end of March 2015, EASTW's total debt increased to Bt6,184 million. The ratio of debt to total capitalization remained fair at 40.93%. EASTW plans capital expenditures of approximately Bt2,500 million in 2015 and Bt1,300 million in 2016 mainly for the ongoing projects of Tab-Ma pond and the Prasae-Nong Pla Lai pipeline. As these investments will be funded primarily with new debts, EASTW’s debt to capitalization ratio is expected to stay at 40%-45% over the next three years. The proposed debenture issue will not affect EASTW's debt profile as it will be used to refinance the existing loans for both projects. The refinancing will help lower EASTW's cost of funding.
Liquidity remains sound at the current rating level. For the first three months of 2015, the ratio of funds from operations (FFO) to total debt was 28.61%, annualized from the trailing 12 months. The earnings before interest, tax, depreciation and amortization (EBITDA) interest coverage ratio stood at 10.83 times. During 2015-2017, TRIS Rating expects EASTW's financial profile weaken slightly yet remain strong. Under TRIS Rating’s base case scenario, EASTW's operating margin will stay above 54% over the period. With its reliable streams of cash, FFO is expected to be at least Bt1,700 million annually. The cash flow will be used to service its financial obligations of Bt800-Bt1,000 million per annum during 2016-2017 and serve the continuous dividend payment policy. EASTW’s financial profile is expected to strengthen after the projects are complete.
Company Rating: A+ Issue Rating: Up to Bt2,400 million senior unsecured debentures due within 2025 A+ Rating Outlook: Stable
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