TRIS Rating has affirmed the company rating of National Power Supply PLC (NPS) at “BBB” and has affirmed the rating of NPS’s senior unsecured debentures at “BBB-“. At the same time, TRIS Rating has assigned the rating of “BBB-’’ to NPS’s proposed issue of up to Bt5,000 million in senior unsecured debentures. The outlook remains “stable”. The proceeds from the new debentures will be used to repay its loans and for planned capital expenditures. The ratings reflect the reliable cash flows NPS receives from the long-term Power Purchase Agreements (PPA) with the Electricity Generating Authority of Thailand (EGAT) under the Small Power Producer (SPP) scheme and the 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.
The “stable” outlook reflects TRIS Rating’s expectation that NPS will be able to maintain proper plant operations and receive reliable cash flows from its power plants. TRIS Rating expects the company to keep its cash flow protection at normal levels and have appropriate capital structure in the long term.
The rating upside case will arise if the company makes a significant improvement in its balance sheet and debt serviceability on a sustainable basis. In contrast, the ratings and/or outlook could be revised downward if plant performance deteriorates and adversely affects NPS’s cash flow or if the company undertakes any sizeable debt-financed investments which weaken the balance sheet and cash flow protection.
NPS is the leading operator of biomass power plants in Thailand. DA held a 25.5% stake in NPS as of August 2015. By the end of 2015, DA plans to sell all NPS shares to its ultimate shareholder, Mr. Yothin Dumnernchanvanit and the other concert party, which currently holds 64.5% of NPS’s shares and 76.2% of DA’s shares. 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 601 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 of business to encompass energy-related businesses and supporting businesses in order to secure its fuel supplies and reduce costs. One of NPS’s subsidiaries makes ethanol from cassava, and can produce up to 500,000 liters per day. Other subsidiaries produce rice bran oil and sell treated water to industrial users. NPS’s supporting businesses include a firm which promotes the planting of eucalyptus trees (called an energy tree) for use as a renewable fuel source, and a research and development company. NPS owns the rights to operate a coal mine in Indonesia and also provides transportation services for coal and biomass and offers floating crane barge services.
The power segment remains NPS’s major source of revenue and earnings before interest, tax, depreciation and amortization (EBITDA). In 2014 and the first six months of 2015, 80%-85% of NPS’s total EBITDA came from the power segment while 15%-20% came from other businesses.
About 50% of NPS’s electricity generating capacity is secured under 25-year PPAs with EGAT. The remaining amounts of electricity output and steam output are supplied to DA under long-term contracts and sold to customers in the industrial estates in Prachinburi and Chachoengsao. NPS’s 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 had relatively smooth operation in 2014. It reported plant availability of 88.5% of total available hours. Plants were managed with forced outages of 3.6% in 2014, compared with 3.9%-5.3% in 2011-2013. In the first six months of 2015, despite smooth operation of coal-fired power plants, four biomass-fired power plants encountered high machinery breakdown. Forced outages jumped to 9.1% of total available hours, compared with 3.6%-5.3% during the past five years. Out of 9.1% forced outages, about 3.2% was caused by incident which was under the insurance coverage. The planned shutdowns were moderate at 9.8% of total available hours for the first six months of 2015, compared with 7.9%-11.5% during 2011-2014. Average plant availability fell to 81.1% of total available hours for the first six months of 2015, from 83.3%-88.5% during 2011-2014. The machinery breakdown cut total power and steam production by 15.1% to 1,419 gigawatt hours equivalent (GWhe) for the first half of 2015.
NPS reported healthy financial performances in 2014. NPS’s profitability and EBITDA improved in 2014, mainly on the back of smooth plant operations, a high electricity tariff rate, and falling coal prices. The operating margin before depreciation and amortization was good at 28.1% in 2014 compared with 23.0%-29.3% in 2011-2013. EBITDA rose to Bt4,314 million in 2014, from Bt3,392 million in 2012 and Bt4,018 million in 2013. However, financial performance softened in the first half of 2015. The operating margin before depreciation and amortization slipped to 22.7% in the first six months of 2015, compared with 33.0% in the same period of 2014. The troubles at some plants hurt NPS’s profitability. In addition, the lower power tariff sold to EGAT and industrial customers according to pricing formula further squeezed the operating margin of NPS. NPS’s tariff structure is linked to bunker oil, coal, and gas which fell by 28.7%, 15.0%, and 6.0%, respectively, compared with the same period of the prior year. The lower tariff outpaced the drop in the coal cost. NPS’s other businesses also recorded weaker performances except for ethanol segment. NPS’s EBITDA plunged to Bt1,436 million in the first six months of 2015, a 46.1% drop over the same period of the prior year. NPS’s total debt continued to increase, climbing to Bt22,135 million as of June 2015, from Bt16,902 million in 2013, because of its ongoing expansions. NPS is developing two new power plants, with a total capacity of 223 MW, and one production line at its ethanol plant. NPS paid Bt1,240 million in dividends during the first half of 2015. As a result, the total debt to capitalization ratio rose to 69.2% as of June 2015, compared with 64.1% at the end of December 2013. The EBITDA interest coverage ratio dropped to 2.3 times in the first six months of 2015, compared with an average of 4 times in 2013-2014. The fund from operation (FFO) to total debt ratio was 10.9% (annualized, from the trailing 12 months) in the first six months of 2015, down from an average of 18% in 2013-2014.
NPS had paid Bt1,786 million to related companies as deposits for land purchases as of December 2013. In 2014, NPS, via its subsidiaries, entered another land purchase agreement to acquire 282 rai of land from related companies at a cost of Bt706 million and NPS paid Bt680 million as a deposit. Deposit of Bt304 million were reduced as some land was transferred. As of June 2015, the outstanding deposit for land purchases from related companies was Bt2,171 million in total.
Looking forward, NPS’s profitability is expected to improve in 2016 as plant operations gradually recover to normal levels. NPS has plans to fine tune the optimal mix of fuel types and fuel management. It will also implement preventive inspection regime to improve the reliability of the power plants. NPS’s revenues will also be driven by two new power plants. One 98-MW power plant started commercial operation at the end of the second quarter of 2015. A 125-MW plant is undergoing test runs and is expected to start commercial operation at the beginning of 2016. NPS’s leverage is expected to gradually improve after it finishes its sizeable investments and the coal-fired power plant under Independent Power Producer (IPP) scheme is delayed. NPS’s capital expenditures will fall from Bt3,000 million in 2015 to Bt800-Bt1,200 million per annum during 2016 and 2017. This planned capital spending should be sufficiently supported by its projected EBITDA of Bt3,000-Bt4,000 million per year.
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