TRIS Rating affirms the company rating on GLOW Energy PLC (GLOW) at “AA-”, and also affirms the ratings on GLOW’s guaranteed debentures at “AA-”. The ratings reflect the company’s solid cash flows from long-term power purchase agreements (PPA), reliable record of operation, and strong financial profile. These strengths are partially offset by exposure to fuel price risk and declining revenue profile.
At the same time, TRIS Rating replaces a “developing” CreditAlert on GLOW’s ratings with a “developing” outlook. The “developing” outlook reflects potential delays in the acquisition of GLOW by Global Power Synergy PLC (GPSC) after Energy Regulatory Commission (ERC) disapproved the transaction.
TRIS Rating highlights that if GPSC becomes the largest shareholder of GLOW, GLOW’s credit profile may change as the new owner may alter the company’s business strategy and financial policies. GLOW’s credit ratings will be capped by the credit profile of GPSC, under TRIS Rating’s Group Rating Methodology.
KEY RATING CONSIDERATIONS
Reliable revenue from PPAs
GLOW’s strong credit profile is derived from long-term contracts with a creditworthy off-taker, Electricity Generating Authority of Thailand (EGAT), and a diverse group of industrial customers. As of September 2018, GLOW’s total capacity was 3,216.7 megawatts (MW). The PPA contracts with EGAT cover 71% of total capacity. GLOW supplies the remaining capacities and steam generating capacities to industrial customers. Sales of electricity to EGAT makes up about 55%-60% of GLOW’s total revenue, while the sales to industrial customers comprises 25%-30%. The balance is sales of steam and water to industrial customers.
Electricity sales to EGAT are reliable and predictable, underpinned by contractual conditions, such as minimum off-take amounts and a mechanism to pass through fuel price. The lives of the existing PPAs with EGAT vary from 2-19 years. Industrial customers are also a steady source of revenue, thanks to lengthy contracts and stable electricity demand since the most of them are large petrochemical producers in Map Ta Phut area.
Strong operational record
GLOW’s operations remain strong, characterized by its long record of high plant availability. The equivalent availability factor (EAF) in the cogeneration segment has stayed over 95% availability for the last five years. The combined EAF of two independent power producer (IPP) power plants, Glow IPP and GHECO-One, has ranged 93%-96% in a year with no scheduled maintenance. The steady high availability demonstrates GLOW’s ability to supply electricity, and thus making the revenue and earning stable and predictable.
Limited exposure to fuel price risk
GLOW’s electricity sales to industrial customers, accounted for 25%-30% of total revenue, expose to fuel price risk. The risk is due to a possible mismatch between the selling price of electricity and its fuel cost used to generate electricity. GLOW’s selling price is based on the Provincial Electricity Authority‘s (PEA) tariff structure, which contains an adjustable Ft component. The Ft component is designed to compensate the private power producer for fuel price fluctuations. However, any adjustments of the Ft payment carry a time lag and related authorities have some discretion over timing and size of the adjustments. As a result, the profit margin of power sold to GLOW’s industrial customers varies more widely than the margin earned on the power sold to EGAT.
Declining stage of revenue
We expect GLOW’s cash flow will decline over the next three years, due mainly to a step down of structured revenue of GHECO-one, a 660-MW coal-fired power plant. As specified in the PPA, GHECO-One’s revenue from the availability payment will drop rapidly during 2019-2020 by about 30%. In addition, the total contracted capacity of cogeneration segment will fall since four PPAs, totaling 230 MW, will expire over 2021 and 2022. According to the National Energy Policy Council’s (NEPC) resolution in May 2016, the four expiring PPAs may be replaced with new contracts. But the contracted capacity in each of new PPAs is likely to be limited at maximum of 30 MW, down from 55-60 MW each in the existing PPAs.
As a result, we forecast that earnings before interest, taxes, depreciation, and amortization (EBITDA) of GLOW will gradually decrease to Bt16-Bt17 billion over the next three years, from Bt18 billion recorded in 2016 and 2017. For the replacement of expiring SPP PPAs, we view that the downside risk may occur from potential delays in obtaining the new PPAs or adverse changes in the detail of new contracts since the certain terms and conditions have not been finalized.
Strong financial profile
TRIS Rating expects GLOW’s financial status will remain strong. Given limited opportunities in Thailand, GLOW is expected to refinance part of its maturing bonds and will continue to pay special dividends in a bid to maintain the current gearing ratio. Over the next three years, we forecast the debt to EBITDA ratio will range between 1.5-2 times.
GPSC’s continued efforts to acquire GLOW
The prospect of completing the acquisition of GLOW by GPSC is unclear after ERC’s disapproval of the transaction. ERC viewed that the transaction was deemed to breach the Energy Industry Act by reducing competition and giving GPSC a near-monopoly in the supply of power to customers in one industrial area. GPSC decided to file the appeal to ERC and will submit additional information by 15 November 2018.
GPSC is an affiliate of PTT PLC, the flagship of the power generating segment. On 20 June 2018, GPSC announced it would purchase 69.11% of GLOW’s outstanding shares, followed by a tender offer for the rest. The total transaction is valued at approximately Bt141 billion.
RATING OUTLOOK
The “developing” outlook reflects the uncertainty surrounding the share ownership transfer between ENGIE (GLOW’s major shareholder) and GPSC post ERC’s disapproval of the transaction. We view that the appeal process will prolong the completion of the deal, meanwhile the timeframe of the appeal process is unclear.
RATING SENSITIVITIES
A change in GLOW’s ratings and/or outlook will mainly depend on the completion of the share ownership transfer, which is subject to final approval from the ERC. The “developing” outlook may be changed to “stable” if the proposed acquisition is halted. If the transaction is allowed to continue, any change in the ratings and/or outlook will happen after we conduct a full assessment of the post-acquisition credit profile of GLOW and the new shareholders. If the acquisition is successfully completed, GPSC will become the largest shareholder of GLOW. The post-transaction credit profile of GPSC will largely determine the credit ratings of GLOW, under our Group Rating Methodology.
GLOW19OA : Bt1,400 million guaranteed debentures due 2019 AA- GLOW218A : Bt5,555 million guaranteed debentures due 2021 AA- GLOW259A : Bt4,000 million guaranteed debentures due 2025 AA- GLOW265A : Bt3,000 million guaranteed debentures due 2026 AA- Rating Outlook: Developing
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