TRIS Rating has affirmed the company rating of National Power Supply PLC (NPS) at “BBB” and has affirmed the ratings of NPS’s existing senior unsecured debentures at “BBB-“. At the same time, TRIS Rating has revised the rating outlook of NPS to “negative” from “stable”. The “negative” outlook reflects NPS’s lower-than-expected performance at the power plant and a weaker balance sheet. TRIS Rating also assigns a rating of “BBB-’’ to NPS’s proposed issue of up to Bt5,000 million in senior unsecured debentures. The proceeds from the new debentures will be used to refinance maturing debentures and short-term loans.
The “BBB” ratings continue to 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 periodic related-party transactions. NPS’s ratings are influenced by the company rating of DA, which has the same ultimate shareholder, according to TRIS Rating’s group rating methodology.
The “negative” outlook reflects NPS's lower-than-expected operational and financial performances. The rating outlook could be revised to "stable" if the company demonstrates the ability to restore the operating performance and improve its debt serviceability to a normal level. In contrast, the ratings could be revised downward if there is no improvement in power operations within 2017. The continued deterioration in capital structure is also a credit negative. NPS’s ratings are also influenced by the company rating of DA, which has the same ultimate shareholder. Any change in the credit rating of DA would affect the ratings of NPS, accordingly.
NPS is the leading operator of biomass power plants in Thailand. DA held a 25.5% stake in NPS as of October 2016. NPS and DA have the same ultimate shareholder, Mr. Yothin Dumnernchanvanit and the other concert party, which currently hold 83.7% of NPS’s shares and 87.8% of DA’s shares. NPS 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 1,339 tonnes per hour of steam. Total power capacity will increase to 726 MW in 2017 after the tenth power plant, with capacity of 125 MW of electricity, commences commercial operation. 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 supplies of fuel and reduce costs.
The power segment remains NPS’s major source of revenue and earnings before interest, tax, depreciation and amortization (EBITDA). In 2015 and the first nine months of 2016, about 80%-85% of NPS’s total EBITDA came from the power segment while 15%-20% came from other businesses.
About 304 MW of NPS’s electricity generating capacity is secured under 25-year PPAs with EGAT. The remaining amounts of electricity and steam outputs 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.
In 2015, NPS’s plant availability was 84.8% of total available hours. NPS reported an average forced outage of 6.4%. The high percentage of forced outages was mainly due to machinery breakdowns at four biomass plants and a shutdown for renovation at one biomass power plant. For the first nine months of 2016, plant availability was 85.5% and the forced outage percentage was moderate at 4.2% compared with annual value ranging from 3.6%-5.3% in 2011-2014. However, the fuel efficiency was relatively lower than the past five years as indicated by the plant heat rate. The plant heat rate was 13,464 BTU/kWhe (British thermal units per kilowatt hour equivalent) in 2015 and 13,699 BTU/kWhe for the first nine months of 2016 compared with the rate below 13,100 BTU/kWhe over the past five years. The higher heat rate indicates more fuel is consumed to produce 1 kWhe.
NPS reported a weaker financial performance in 2015 and in the first nine months of 2016 due to machinery problems and a lower electricity tariff rate. The operating margin (operating income before depreciation and amortization as percentage of sales) declined from 28.1% in 2014 to 23.1% in 2015 and further declined to 19.9% in the first nine months of 2016. The company’s electricity tariff for the power sold to EGAT is linked to the price of coal, fuel oil, and natural gas. The electricity tariff for coal plants, as specified in the PPA covering 180 MW or 30% of NPS's power capacity, is linked to the price of coal 75%, which contains a pass-through mechanism to EGAT. The electricity tariff for the biomass plants is linked to the prices of fuel oil and natural gas, even though these plants use biomass for fuel. The steep and prolonged slump in the price of oil during 2014-2016 leads to a drop in average price of power sold to EGAT, and a fall in the fuel adjustment charge (Ft) causing a decrease in average price of electricity sold to industrial customers. However, the price of biomass fuel did not fall as much as oil price sagged resulting in the thinner margin for power business. Losses in the shipping and ethanol businesses also dragged down NPS’s profits. NPS’s EBITDA plunged to Bt2,967 million in 2015 from Bt4,322 million in 2014. In the first nine months of 2016, EBITDA declined further to Bt1,956 million, a 16% drop over the same period of the prior year. NPS’s total debt increased from Bt19,921 million at the end of 2014 to Bt22,278 million at the end of September 2016. The increase in debt was due to the expenditures for the ongoing expansion projects. The drop in net profit and a dividend payout of more than 200% of net profit caused NPS’s total debt to capitalization ratio to rise to 70.7% as of September 2016, compared with 64.8% at the end of December 2014. Cash flow protection weakened on the back of falling profits and rising leverage. The EBITDA interest coverage ratio dropped to 2.4 times in 2015 and 2.1 times for the first nine months of 2016, compared with an average of 3-4 times during 2011-2014. The fund from operation (FFO) to total debt ratio was 9.0% in 2015 and 6.9% (annualized, from the trailing 12 months) for the first nine months of 2016, down from an average of 17% in 2011-2014.
Since 2008, NPS had made deposit payments to related companies for land it intends to purchase for the future power projects. As of September 2016, the outstanding deposits paid to related companies for land purchases for an Independent Power Producer (IPP) project was Bt1,768 million in total. The land purchase prices in these transactions are well above the appraised value of Bt678 million set by an independent appraiser. However, the land purchase agreements have a condition that the purchased area and the prices for the land will be finalized after required permits are approved. The final price will be based on the latest appraised values, according to the agreements.
Looking forward, despite the pressure from rising prices of coal and a low tariff in the short term, NPS’s profitability is expected to improve in 2017 from the low level in 2016. NPS has been implementing its reorganization by centralizing the control of production and fuel procurement in order to improve power plant efficiency and reduce costs. NPS emphasizes a preventive inspection regime to increase plant reliability. The improvement program started in mid-2016 and NPS expects to see material benefits starting from 2017 onwards. In the long term, NPS is expected to benefit from a higher tariff following oil and gas price rise. NPS’s leverage is expected to gradually improve after the sizeable investments needed for new plants are finally complete. The FFO, estimated at Bt2,100-Bt2,700 million per year, plus cash on hand of Bt600 million, should cover maintenance capital expenditures of about Bt600-Bt1,000 million per annum during 2017 and 2018. However, it needs to refinance some debts as it has scheduled debt repayments and financial lease payment totaling Bt1,100-Bt1,800 million per annum over the next three years. NPS also plans to refinance all maturing debentures. In 2017, debentures totals Bt3,968 million will be mature in January and October 2017.
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