TRIS Rating has affirmed the company rating of Thai Solar Energy PLC (TSE) at “BBB” with “stable” outlook. The rating continues to reflect predictable cash flows TSE receives from the long-term power purchase agreements (PPAs) with state-owned utility off-takers, satisfactory performances of the main power plants, and good prospects for renewable energy in Thailand. However, the rating is partially offset by TSE’s short track record of operations, execution risk of new projects, and a potential rise in leverage in the wake of the company’s debt-funded capacity expansion.
The “stable” outlook reflects the expectation that TSE remains its capability of generating sizable cash flows from its core solar power projects in the years ahead, on the back of sustained operating efficiencies.
The credit upside for TSE would occur if the company successfully expands capacity and thus significantly enlarges its cash flow base. In contrast, the credit downside for TSE would emerge if the project performance falls devastatingly short of estimates. A weaker financial profile would also weigh down the rating. This could happen from excessive debt-funded investments, or a failure to deliver satisfactory returns from the projects under development.
TSE is an investment holding company, created to develop renewable energy power projects. TSE first carried out several solar power plants in Thailand before it looked for growth by expanding overseas. The company was established in 2008 and was listed on the Market for Alternative Investment (MAI) in October 2014. As of September 2016, the company has secured a total contracted capacity of about 136 megawatts (MW), comprising a 4.5-MW solar thermal project, 80-MW solar farm projects, 14-MW solar rooftop projects, a recently acquired 1-MW co-operative solar farm project, and 36.5-MW solar farm projects in Japan. All domestic projects, except for the co-operative project, are operating. A significant portion of the solar farm projects in Japan are in the development and construction phase. In pursuit of broadened mix of energy, the company recently announced to acquire for Bt2.5 billion three biomass power projects located in southern part of Thailand. All three projects have secured PPAs, covering contracted capacity of 22.2 MW in aggregate.
TSE’s business profile is satisfactory, largely supported by reliable cash flows from the sale of electricity to the Provincial Electricity Authority (PEA) and the Metropolitan Electricity Authority (MEA). TSE’s 80-MW solar farm projects have multi-year PPAs that receive a favorable tariff adder of Bt6.5 per kilowatt hours (kWh) for 10 years. The 14-MW solar rooftop projects carry PPAs obtaining the feed-in-tariff (FIT) of Bt6.16 per kWh for 25 years. The predictable cash flows from the solar power projects are supported by the contractually committed tariffs and the minimal payment risk of the buyers of solar power. TSE’s solar power projects have low resource risk and operational risk due to use of proven technology and less sophisticated production relatively to other types of power.
The rating considers the forecast-beating performance of the 80-MW solar farm projects, the centerpiece of TSE’s profit-making assets. The projects are managed by Thai Solar Renewable Co., Ltd. (TSR), established as a 60:40 joint venture (JV) between TSE and Global Power Synergy Company PLC (GPSC). The solar farm projects contributed approximately 90% of total revenue in 2015, followed by an 8% contribution from the solar rooftop projects. TSE uses certified solar panels, with an output guarantee of 10 years, obtained from two leading solar energy developers, Conery and SunEdison, which help secure minimum the revenue from the solar farm projects. However, the weak financial profiles of both companies have somewhat led to concerns over the assurance provided by the power output guarantors. The rating also incorporates the encouraging prospects for renewable sources of energy in Thailand, as evidenced by the government’s concrete long-term plan to develop alternative energy sources.
On the opposite end, TSE’s business strengths are weighed down by its short track record of operation as a solar power producer in Thailand and overseas market. The rating also takes into account execution risks in forthcoming biomass power projects. In essence, a biomass project carries higher execution risks than a solar power project. In addition, the operational risks of the biomass power project are higher due to greater exposures to a likelihood of long operational outages, resource risks, and volatile fuel prices. The rating is also tempered by a potential rise in financial leverage as the company continues to add power generating capacity.
TRIS Rating notes that TSE’s reported financial statements do not fully reflect its revenue and debt exposure as TSE records the performance of the 80-MW solar farm projects, or TSR, by the equity method. Thus, TRIS Rating adjusts important figures, such as revenue, earnings before interest, tax, depreciation, and amortization (EBITDA), funds from operations (FFO), and total debts, by including TSR’s financial performance on pro-rata basis in the rating assessment to reflect the company’s financial performance and potential exposure.
Going forward, TRIS Rating views that TSE’s business profile will strengthen, supported by enlarging business scale and improving geographical diversification. TSE’s revenue is expected to grow when the projects currently under development start full operations. With respect to the solar farm in Japan, TSE recently started up 5.24 MW of capacity, out of a total secured contract of 36.5 MW. The remaining portion of 31.2 MW will start operations by the third quarter of 2018. For the biomass projects, a 4.6-MW biomass power plant targets commercial operating date (COD) in the third quarter of 2017 while the other two biomass power projects with 17.6 MW have a COD in the first half of 2018. Based on these projects, TRIS Rating’s base case forecast assumes TSE’s adjusted revenue will rise to Bt2-Bt2.2 billion during 2017-2019. Adjusted FFO will improve to Bt0.9-Bt1.1 billion per year during the same period.
The company’s capital expenditures for the current projects will amount to a total of Bt6.5-Bt7 billion deployed during 2017-2018. TRIS Rating notes that the amount of capital expenditures may increase as the company continues to explore investment opportunities. However, taking in to account only the projects that have already been announced, TRIS Rating expects the debt to capitalization ratio will increase and range between 60%-65% during 2017-2019. The FFO to total debt will range from 10%-13% over the forecast period.
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