TRIS Rating has assigned the company rating of Energy Absolute PLC (EA) at “BBB+” with “stable” outlook. The rating reflects the predictable cash flows of EA’s solar power projects from the long-term power purchase agreements (PPAs) with the Electricity Generating Authority of Thailand (EGAT) and the Provincial Electricity Authority (PEA), and EA’s position as one of the leading producers of biodiesel (B100) in Thailand. However, the rating is constrained by construction and operational risks associated with the wind power projects, EA's limited track record as a power producer, and its highly leveraged balance sheet.
The “stable” outlook reflects TRIS Rating's expectation that EA’s solar plants will generate the predictable cash flows as planned. The average performance ratio of the solar projects should remain above 79%. The company is also expected to successfully execute the two wind power projects and earn satisfactory returns. The rating assumes that EA will secure additional equity funding if it chooses to make any sizable investments.
A rating upgrade would be unlikely during the construcition of the wind projects. However, the rating upside case could develop if the performance of the wind projects proves consistently above our expectations and operating costs are within budget. On the contrary, we could lower the rating if EA’s solar or wind projects do not meet their performane targets, or its capital structure deteriorates markedly as a result of the failure to generate sufficient cash flows or aggressively debt-funded investments.
Established in 2006, EA was previously known as Suntech Palm Oil Ltd before changing its name to Energy Absolute PLC in 2008. Up until 2012, EA’s core business was to manufacture and sell biodiesel products. However, in late 2012, EA expanded the business into renewable energy generation through the development of solar and wind power projects. EA was listed on the Market for Alternative Investment (MAI) in 2013. As of March 2016, Mr. Somphote Ahunai was the major shareholder, holding approximately 43% interest in EA.
The company has a total contracted capacity of 664 megawatts (MW) involving 278 MW of four solar projects currently operating (including one new solar project which just commenced operations in April 2016), and another 386 MW from two wind projects under construction.
The full-year performance of EA's power business in 2015 was contributed from the solar projects in Lopburi, Nakornsawan, and Lampang provinces. These solar operations accounted for more than 90% of the company’s total earnings before interest, tax, depreciation, and amortization (EBITDA) of Bt4.1 billion for 2015.
EA has power purchase agreements (PPAs) with the EGAT for the total capacity of 270 MW from its three solar projects. The projects secure long-term PPAs under Small Power Producer (SPP) scheme and receive the adder rate of Bt6.5 per kilowatt-hour (kWh) for 10 years. In 2015, EA generated the total output of 396 gigawatt hours (GWh), an increase of 86% from the 213 GWh produced in 2014. The rise reflects the added capacity of the solar plant in Lampang.
The performance of EA’s solar projects was satisfactory. Since inception, the actual annual output of all solar plants has exceeded their initial estimates based on a 90% probability (P90) of energy production by 11% on average. The actual output was slightly higher for the solar plant in Lampang where the tracker technology was installed. The tracking system is also adopted for the new solar plant located in Phitsanulok province, and the project is expected to give the similar positive impact on its energy output.
For biodiesel segment, EA has the established position in the B100 market in Thailand. EA underwent the capacity expansion in its biodiesel business to 800,000 liters per day, and was among the country's largest producers in the B100 based on the estimated capacity of the industry in 2015. EA's biodiesel business has showed steady improvements in capacity utilization and profitability, with its EBITDA reaching Bt560 million in 2015.
The rating is constrained by the inherent risks of the company's wind power projects currently under construction. The first wind project called Hadkunghan (HKH), located in Nakornsithammarat and Songkla provinces, with a contracted capacity of 126 MW. The second wind project called Hanuman (HNM), located in Chaiyaphum province, with a contracted capacity of 260 MW. HKH and HNM are expected to commence operations by mid-2016 and 2018, respectively. Compared to a solar power project, a wind power project carries higher execution risks such as installation risk of key components and construction difficulty that can lead to cost overrun or project delay. In addition, the operational risks of a wind farm project are higher. Actual wind speeds may deviate significantly from expectations greatly reducing power output, and the project’s cash flows.
EA has a highly leveraged balance sheet. Its power projects employ project financing where the capital structure entails the debt-to-equity ratio (D/E) of 3 times for solar power projects, and around 2.3 times for the HKH wind power project. Due to the large-scale investment and the progress of the development in each project, EA’s total debt to capitalization ratio steadily escalated from 58.2% at the end of 2013 to 72.3% at the end of 2015, and 71.4% at the end of March 2016. The high level of leverage is partly offset by stable and predictable cash flows produced by solar projects. Solar farms earn high operating margins (operating income before depreciation and amortization as a percentage of sales) because of the adder tariff and low operating expenses.
TRIS rating’s base-case scenario expects EA’s operating margin to stay in the range of 50%-55% during 2016-2019. The gradual improvement of the margin is from the higher contribution of power projects which generate the better margin than the biodiesel business. Within the power business, the wind projects will earn lower margins than the solar projects because the wind projects have a lower tariff adder rate while incurring higher operating expenses. The adder rate for both of EA’s wind farms is Bt3.5 per kWh, compared with the adder of Bt6.5 per kWh for most of its solar farms. EA's total EBITDA is expected to double in the next four years when the wind projects are all up and running, and the total power capacity in operation reaches 664 MW. However, the total EBITDA is forecasted to gradually decline from 2023 onwards as the adder scheme starts to expire.
Looking forward, EA’s total debt to capitalization ratio is expected to improve gradually toward the range of 60%-65% when all the power projects are up and running and performing as expected. During 2016-2019, the company’s funds from operations (FFO) to total debt are expected to hold at 15%-20%.
TRIS Rating Co., Ltd./www.trisrating.com Contact: santaya@trisrating.com, Tel: 0-2231-3011 ext 500/Silom Complex Building, 24th Floor, 191 Silom Road, Bangkok 10500, Thailand ? Copyright 2016, TRIS Rating Co., Ltd. All rights reserved. Any unauthorized use, disclosure, copying, republication, further transmission, dissemination, redistribution, or storing for subsequent use for any purpose, in whole or in part, in any form or manner or by any means whatsoever, by any person, of the credit rating reports or information is prohibited, without the prior written permission of TRIS Rating Co., Ltd. The credit rating is not a statement of fact or a recommendation to buy, sell or hold any debt instruments. It is an expression of opinion regarding credit risks for that instrument or particular company. The opinion expressed in the credit rating does not represent investment or other advice and should therefore not be construed as such. Any rating and information contained in any report written or published by TRIS Rating has been prepared without taking into account any recipient’s particular financial needs, circumstances, knowledge and objectives. Therefore, a recipient should assess the appropriateness of such information before making an investment decision based on this information. Information used for the rating has been obtained by TRIS Rating from the company and other sources believed to be reliable. Therefore, TRIS Rating does not guarantee the accuracy, adequacy, or completeness of any such information and will accept no liability for any loss or damage arising from any inaccuracy, inadequacy or incompleteness. Also, TRIS Rating is not responsible for any errors or omissions, the result obtained from, or any actions taken in reliance upon such information. All methodologies used can be found at http://www.trisrating.com/en/rating_information/rating_criteria.html.