TRIS Rating affirms the company rating on GLOW Energy PLC (GLOW) and the ratings on GLOW’s guaranteed debentures at “AA-”. At the same time, TRIS Rating revises the rating outlook to “stable” from “developing”. The change to “stable” outlook reflects our view that there is no material impact on GLOW’s credit profile after reviewing the effect from Global Power Synergy PLC (GPSC) becoming GLOW’s major shareholder.
The “AA-” ratings continue to reflect the company’s solid cash flow generation, supported by long-term power purchase agreements (PPA), reliable record of operation, and expected strong financial profile.
Since GPSC is now the ultimate shareholder of GLOW, GLOW’s credit ratings will be linked to the credit profile of GPSC according to TRIS Rating’s Group Rating Methodology.
KEY RATING CONSIDERATIONS
Post-acquisition business risk remains unchanged
We do not expect the change of GLOW’s major shareholders from ENGIE to GPSC to have any material impact on GLOW’s operation. GPSC is the flagship company of the power generating business under PTT Group. After consolidation with GPSC, GLOW’s operation approximately constitutes 60% of GPSC’s total electricity capacity and 70% of GPSC’s earnings before interest, taxes, depreciation, and amortization (EBITDA). GLOW’s long-standing experience and expertise in operating cogeneration and large-scale power plants will be leveraged to enhance GPSC’s operating efficiency as well as the development of new projects in the future.
Solid cash flow generation
We expect GLOW’s steady cash flow generation to continue, underpinned by sizable PPAs with the Electricity Generating Authority of Thailand (EGAT) and industrial customers. As of 30 June 2019, GLOW’s total equity capacity was 2,771 megawatts (MW). The PPAs with EGAT cover 70% of equity capacity and the remaining capacity is contracted with industrial customers.
Electricity sales to EGAT are reliable since the conditions in the PPAs, comprising minimum off-take amounts and a pass-through mechanism of fuel costs, help mitigate demand risk and fuel price risk. The remaining lives of the existing PPAs with EGAT are long, varying from five to 18 years. The PPAs with industrial customers are also a steady source of revenue, supported by strong electricity demand from large petrochemical producers in the Map Ta Phut area.
TRIS Rating forecasts that GLOW’s contracted capacity with EGAT will drop by 300 MW during 2022-2025. We believe that GLOW’s seven expiring PPAs under the small power producer (SPP) program will be renewed but the contracted capacity in the new PPAs will drop to 30 MW per each PPA from 60-90 MW per each PPA previously. The contract renewal risk lessened after the resolution of the National Energy Policy Council (NEPC) in January 2019 reconfirmed the SPP replacement program in clearer detail.
Strong operating efficiency
GLOW has long-standing track record of achieving high operating performance. Over the past several years, GLOW’s plant factors have demonstrated reliable operating results such as high level of availability, plus well controlled plant heat rate and operating costs. GLOW also has proven project management skills from executing a number of SPP projects and independent power producer (IPP) projects in the past. We believe that GLOW’s excellent plant operation will continue and help sustain its stable revenue and earnings over the long term.
Exposure to fuel price risk
GLOW partially exposes to fuel price risk in the PPAs with industrial customers. The risk is caused by a possible mismatch between the adjustable Ft in tariff rate and its fuel cost used to generate electricity. The Ft adjustment carries a time lag and is subject to the authorities’ discretion on the timing and size of the adjustments. The diverging movements between the Ft adjustment and fuel cost could result in a swing of GLOW’s EBITDA. However, its impact is limited as the electricity sales to industrial customers made up only about 25%-30% of GLOW’s total revenue.
EBITDA continues to be strong
We forecast GLOW’s EBITDA to stay between Bt14.5-Bt15.5 billion a year during 2019-2021. We expect the demand from its petrochemical customers to remain strong despite the weak market sentiment. Some upsides of EBITDA would stem from realizing synergy benefits between GLOW and GPSC from the integration of power networks. GLOW’s electric supply to industrial customers may increase to some extent since GPSC plans to reallocate some of their industrial customers to GLOW, given the lower production cost of GLOW’s power plants.
Strong financial profile
TRIS Rating expects GLOW’s net debt to EBITDA ratio to stay between 1.5-2.5 times during 2019-2021, largely due to projected small capital expenditures (CAPEX). GLOW’s major CAPEX is earmarked for the first phase of its SPP replacement projects. The project needs investment budget of about Bt6 billion during 2020-2022. We believe that GLOW’s long-term growth potential is likely to be limited as new power projects are likely to be executed at GPSC’s level instead. We expect the excess cash on hand of GLOW to be paid as dividends to support GPSC’s deleverage plan.
BASE-CASE ASSUMPTIONS
• Average EBITDA to be around Bt14.5-Bt15.5 billion during 2019-2021
• EBITDA margin to be between 30%-32% during 2019-2021
• Capital spending to be around Bt2.5-Bt3.5 billion per annum during 2019-2021
• 90% dividend payout between 2020-2021
RATING OUTLOOK
The “stable” outlook reflects our expectation that GLOW will continue its strong, steady cash flow generation in the foreseeable future. We also expect GLOW to sustain a good operating performance and its strong financial profile. We do not expect GLOW to undertake new and sizable investments over the next 2-3 years.
RATING SENSITIVITIES
A rating and/or outlook upgrade could happen if there is an uplift in GPSC’s credit profile since GLOW’s ratings are tied to GPSC’s credit profile. In contrast, the ratings and/or outlook could be revised downward if GLOW’s net debt to EBITDA increases to above 4 times for a sustained period. The ratings or outlook could also be revised downward if, in our view, there is material deterioration in GPSC’s credit profile.
COMPANY OVERVIEW
GLOW is a leading private power producer in Thailand. The company was established in 1993 to provide utility services in the Map Ta Phut area. GLOW was listed on the Stock Exchange of Thailand (SET) in April 2005. The business comprises the cogeneration (including the SPP) and the IPP segment. The company and its affiliates supply electricity, steam, and treated water to large customers in the Map Ta Phut Industrial Estate, the Eastern Seaboard Industrial Estate, and Siam Eastern Industrial Park.
GPSC is currently the ultimate shareholder of GLOW after the company announced its acquisition of GLOW in mid-2018. As of 30 June 2019, GPSC held 99.5% interest in GLOW. GPSC will purchase the remaining shares of GLOW and plans to delist GLOW within December 2019.
As of 30 June 2019, GLOW’s power generating capacity totaled 3,093 MW, consisting of 1,525 MW in the IPP plants and 1,556 MW in the cogeneration segment. GLOW’s equity capacity was 2,771 MW.
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