TRIS Rating has affirmed the company rating of Eastern Power Group PLC (EP) at “BBB” with “stable” outlook. The rating reflects 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 nation’s energy needs. These strengths are partially offset by EP’s short track record as a power producer, the execution risks of the projects, as well as the highly-leveraged capital structure to fund its growth opportunities.
The “stable” outlook reflects the expectation that EP is capable of operating a larger portfolio of power-generating assets. EP’s existing solar plants will keep performing satisfactorily, without any significant replacement costs. In the meantime, the new power plants are expected to operate as planned, leaving EP with sizable and sustainable cash flows, as well as satisfactory returns. In addition, EP’s capital structure is not expected to substantially deteriorate from the current level.
The credit upside case could develop as EP builds a track record in its core business, and enlarges the cash flow base, despite greater exposures to operational and country risks. In contrast, downward pressure on the rating could emerge should EP fail to maintain satisfactory performance and build its track record, or fail to generate sufficient cash flow, or if the capital structure deteriorates markedly.
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). Based upon the sizable contribution it makes to EPCO and the promising prospects for solar power, EP is considered a core subsidiary of EPCO. In 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”. Afterward, EP gradually increased its capital for totally Bt750 million, which will be used for acquisitions of cogeneration power companies. As of August 2016, EPCO’s ownership share of EP reduced to 75%.
The rating reflects the predictable cash flows EP receives from its solar power projects. EP has secured long-term Power Purchase Agreements (PPAs) with the Provincial Electricity Authority (PEA) and the Metropolitan Electricity Authority (MEA). In 2012, EP launched 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. During 2014-2015, the company invested in eight solar rooftop projects in Bangkok and Samutprakan province, with a contracted capacity of 1.5 MW in aggregate. All solar farm and rooftop projects are in operation, each obtaining favorable tariffs according to multi-year PPAs with the state-owned electricity distributors. The predictable cash flows from the solar power projects are partly substantiated by the contractually committed tariff and the minimal payment risk of the power buyers.
During 2015-2016, EP acquired and developed a 9.9 MW solar farm project in Kyoto, Japan, at a cost of Bt1.03 billion. The project commenced operation in November 2016. EP acquired a 5-MW co-operative solar farm project in Prachinburi province, at a cost of Bt268 million. The project is scheduled to operate by the end of 2016. The co-operative solar farm project has PPAs with the MEA and obtained a favorable feed-in-tariff (FiT) of Bt5.66 per kWh for 25 years. EP has recently pledged to invest up to Bt2.65 billion in two cogeneration power companies, a move that will shore up capacity and broaden the mix of energy it produces. EP vows to purchase 49.5% of PPTC Co., Ltd. (PPTC) and a 30% stake in SSUT Co., Ltd. (SSUT). Located in Latkrabang, Bangkok Industrial Estate, PPTC’s cogeneration power plant has been operational since March 2016. The plant can produce up to 120 MW of electricity and 30 ton per hour of steam. SSUT owns two plants, with an aggregate capacity of 240 MW of electricity and 60 ton per hour of steam, located in Bang-Pu Industrial Estate, Samutprakarn Province. The two plants owned by SSUT are scheduled to full operate by the end of 2016. The acquisitions will boost earnings because EP’s capacity to produce power will edge up to 131.4 megawatts equity (MWe) in aggregate.
The rating also incorporates EP’s satisfactory performance since its inception. EP's average plant performance ratio was acceptable at 83%. Power output rose from 17.8 gigawatt hours (GWh) of electricity in 2013 to 31.5 GWh in 2015. For the first nine months of 2016, the output reached 23.5 GWh. Output rose because EP added new capacity during 2013-2015. The existing power projects generated revenue of Bt200-Bt350 million per year during 2013-2015, and Bt255 million for the first nine months of 2016. The earnings before interest, tax, depreciation, and amortization (EBITDA) margin is 80%-90% of total revenue. The rating takes 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 contrary, EP’s short track record in the power segment keeps a lid on the rating. EP’s performance over the long haul has yet to be proven. The rating is also constrained by the execution risks associated with the current and forthcoming projects. EP heavily invested in cogeneration, which is more complicated and carries higher execution risks than solar power. The company is also exposed to country risk, following the investment in Japan. The rating is tempered by the high-leveraged capital structure used to fund EP’s growth opportunities. The total debt to capitalization ratio was 52.2% at the end of June 2016. The ratio decreased from 61.1% in 2015 due to a capital injection. However, the ratio increased to 68.2% at the end of September 2016. EP’s investment in cogeneration power projects and solar power project in Japan will raise the debt to capitalization ratio to around 70%-73%. The funds from operations (FFO) to total debt ratio stood at 21.7% as of 2015 and 5.6% for the first nine months of 2016. EP sees growth ahead for solar power in both Thailand and Japan. The company plans to invest in more solar farm projects in Japan, adding 23 MW of new capacity. The total cost of the new projects abroad is Bt2.7-Bt3 billion, with construction spanning 2017-2018. Should the deals be executed, EP would shoulder a higher debt load during the development phase. The large-scale investments will put pressure on the financial profile during 2016-2019.
TRIS Rating’s base-case scenario assumes EP’s contracted capacity will reach 158-163 MW, comprising a 26-32 MW of solar power and 131.4 MWe of cogeneration power. EP should recognize income from the Kyoto and co-operative solar farms, as well as the two cogeneration plants from 2017 onwards. The performance ratio for the solar power plants will range from 80%-85%. The amount of electricity produced, except for the cogeneration plants, in the base-case scenario is expected to range from 35-45 GWh per annum. During 2017-2019, revenues are expected to range between Bt400-Bt500 million per annum, with EBITDA of Bt500-Bt700 million per year. EP’s operating margin (operating profit before depreciation and amortization as a percentage of revenue) should stay in the range of 80%-85%. The FFO are expected at Bt350-Bt550 million per annum. EBITDA and FFO are expected to rise as the company begins to see returns from the investments in the cogeneration projects. However, EBITDA is expected to gradually decline as the electricity tariff adder scheme starts to expire from 2022 onwards. During 2016-2019, the debt to capitalization ratio is expected to range between 70%-75% as EP borrows to fund its investments.
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.