TRIS Rating has assigned a rating of “A-” to the proposed issue of up to Bt8,000 million in senior partially guaranteed debentures of Energy Absolute PLC (EA). At the same time, TRIS Rating has affirmed the company rating of EA at “BBB+”. The outlook remains “stable”. The proposed debentures are partially guaranteed by Siam Commercial Bank PLC (SCB). Under the terms and conditions of the partial guarantee, SCB guarantees to be responsible for 65% of the principal and the interest. The proceeds from the new debentures will be used mainly to refinance EA’s shor-term and long-term debts while the remainder will be reserved for its working capital needs.
The ratings reflect 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 ratings are 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 ratings assume 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) covering 278 MW of four solar projects currently operating (including the newest solar project 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 PPAs with the EGAT for the total capacity of 270 MW from its three solar projects. The projects secure long-term PPAs under the 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. This 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 production 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 ratings are 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 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 three 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%.
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