TRIS Rating has assigned a rating of “BBB-” to the proposed issue of up to Bt1,000 million in senior unsecured debentures of Eastern Power Group PLC (EP). At the same time, TRIS Rating has affirmed the company rating of EP at “BBB”. The outlook remains “stable”. The company will use the proceeds from the new debenture issue to fund its expansion plans and/or working capital. The ratings reflect the company’s satisfactory performance, the predictable cash flows from its solar power projects, and an encouraging outlook for renewable energy as a way to meet the energy needs. These strengths are partially offset by EP’s brief track record as a solar power producer, the execution risks of the projects, as well as a high-leveraged capital structure to fund its growth opportunities.
The “stable” outlook reflects the expectation that EP’s solar plants will keep performing satisfactorily, without any significant replacement costs. The plant performance ratio should remain above 78%. The company is also expected to recognize sizable and sustainable annual cash flows, with earnings before interest, tax, depreciation, and amortization (EBITDA) ranging from Bt280-Bt450 million annually over the next three years. EP is expected to successfully execute its upcoming projects in Thailand and abroad and earn satisfactory returns, without substantially deteriorating its capital structure.
The rating rise could occur should EP deliver remarkable success in expanding its core business amid tougher competition and lower tariffs on future projects. In contrast, downward pressure on the rating could emerge should EP fail to maintain satisfactory performance and build its track record, or if EP fails to generate sufficient cash flow, or if its capital structure deteriorates markedly.
Formerly known as Borploi Solar Co., Ltd., EP was established in 2010 as a renewable energy company. In 2012, the company became a subsidiary of Eastern Printing PLC (EPCO), a leading provider of printing services in Thailand, after EPCO acquired EP from Inter Far East Engineering PLC (IFEC). In 2015, EP reorganized to focus on solar power projects in Thailand and abroad. Based upon the sizable contribution it makes to EPCO and the promising prospects for solar power, EP is considered a core subsidiary of EPCO. On 7 January 2016, the company changed its legal status to a public company and changed its name from “BorPloi Solar Co., Ltd.” to “Eastern Power Group PLC”.
The ratings reflect the predictable cash flows EP receives from its solar power projects. EP, through its wholly-owned subsidiaries, has secured long-term Power Purchase Agreements (PPAs) with the Provincial Electricity Authority (PEA) and the Metropolitan Electricity Authority (MEA). In 2012, EP launched the first two pilot solar farm projects in Kanchanaburi province, with a total contracted capacity of 10 megawatts (MW). The two projects commenced operation in mid-October 2012. In 2013, EP added a solar farm project in Lopoburi province, with a contracted capacity of five MW. The project has been operational since February 2014. All EP’s solar farm projects operate under the purchase of power from Very Small Power Producer (VSPP) scheme, receiving a government-supported tariff adder of Bt8 per kilowatt hour (kWh) for 10 years.
During 2014-2015, the company invested in eight solar rooftop projects in Bangkok and Samut Prakan province, with a contracted capacity of 1.5 MW in aggregate. The solar rooftop projects have secured PPAs with the MEA and obtained a favorable feed-in tariff (FiT) of Bt6.55 per kWh for 25 years. The predictable cash flows from the solar power projects are hence partly substantiated by the contractually committed tariff and the minimal payment risk of the solar buyers.
The ratings also incorporate EP’s satisfactory performance since its inception. As of September 2015, all of EP's solar farm and solar rooftop projects were in operation, with an aggregate contracted capacity of 16.5 MW. EP's average plant performance ratio was acceptable at 78%. EP's power output rose from 17.8 gigawatt hours (GWh) of electricity in 2013 to 27.7 GWh in 2014. For the first nine months of 2015, the output was recorded at 24 GWh. The output rose because EP added new capacity during 2013-2015. These solar power projects generated revenue of around Bt200 million per year during 2013-2014, and Bt267 million for the first nine months of 2015. Earnings before interest, tax, depreciation, and amortization (EBITDA) margin are about 90% of total revenue. Given the existing capacity, EP’s solar power projects should generate 30-32 GWh of electricity per year or Bt300-Bt350 million in revenue per annum.
The ratings take into account the encouraging prospects for the use of renewable sources of energy in Thailand, chiefly evidenced by the government’s concrete long-term plan to develop alternative energy sources, the support given to producers of solar power, and the steady growth in energy consumption. On the opposite end, the ratings are partially offset by the limited performance record of EP’s solar power projects, notwithstanding the use of proven photovoltaic (PV) technology. To ensure a sustainable output performance over the long haul, a solar power plant must be well-designed, use proven technology and certified equipment, operate efficiently, and employ timely maintenance practices. EP’s performance on these dimensions is yet to be proven.
The ratings are also constrained by execution risks. EP must manage the execution risks in its current and forthcoming projects. Example of execution risks are the availability of manpower and equipment to supervise and monitor the power production sites, technological risk which may rapidly change the cost structure, more competitors as a result of limited barrier to entry, regulatory issues such as the tariff scheme and the government subsidies, as well as country risk inherent in operations abroad.
The ratings are further tempered by a high-leveraged capital structure to fund EP’s growth opportunities. EP plans to invest in solar power projects in Thailand and Japan. The large-scale investments will put pressure on its financial profile during 2015-2018. The company plans to invest in solar farm projects in Japan, with a total capacity of 48 MW. The total cost of the new projects is Bt5-Bt6 billion, with construction spanning 2016-2018.
TRIS Rating’s base-case forecast expects EP’s operating margin (operating profit before depreciation and amortization as a percentage of revenue) should stay in the range of 85%-90% during 2015-2018. A solar power project typically has a high operating margin because of a government subsidy in the form of a tariff adder and low operating expenses. The electricity tariff for EP’s solar farms comprises three components: the time of use (TOU) tariff, the Ft (Fuel Adjustment Charge), and the adder. All of EP's solar farms obtain a favorable electricity tariff of approximately Bt11.5 per kWh. The solar rooftop projects secure an FiT of Bt6.55 per kWh. EBITDA is forecasted to range from Bt280-Bt450 million per year. Funds from operations (FFO) are expected at Bt230-Bt350 million per annum.
EP’s total debt to capitalization ratio was 59.3% at the end of September 2015. The ratio decreased from 68.8% in 2014 as EP repaid some loans. FFO to total debt ratio stood at 26% as of 2014 and 21% for the first nine months of 2015. During 2015-2018, TRIS Rating’s base-case scenario expects EP’s contracted capacity will reach 50-55 MW and the performance ratio will be 75%-78%. The amount of electricity produced in the base-case scenario is expected to range from 80-85 GWh per annum. Revenues are expected to range between Bt300-Bt500 million per annum, with EBITDA of Bt280-Bt450 million per year. However, EBITDA is expected to gradually decline as the adder scheme starts to expire from 2022 onwards. During 2015-2018, the debt to capitalization ratio is expected to rise to 70%-75% as EP borrows to fund its investments.
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