TRIS Rating affirms the company rating on Super Energy Corporation PLC (SUPER) at “BBB-”. At the same time, we revise the rating outlook of SUPER to “positive” from “stable” to reflect the completed development of large-scale solar power projects in Vietnam, the company’s first overseas investments. The rating outlook embeds our expectation on the satisfactory performance of SUPER’s overseas projects.
The rating reflects the predictable cash flows SUPER receives from its power projects. Each project has long-term power purchase agreements (PPAs) with state-owned utilities. However, the rating is tempered by SUPER’s large-scale expansion, a potential surge in debt load, and a greater exposure to country risk. Also, execution risks associated with overseas projects remain a concern.
KEY RATING CONSIDERATIONS
Predictable cash flows
The company rating is predicated on the predictable cash flows SUPER receives from its power plants. SUPER currently owns more than one hundred operating power plants. In all, SUPER has contracted capacity of nearly 760 megawatts (MW).
Solar power remains the centerpiece of SUPER’s power-generating assets (750 MW). The predictable cash flows are largely underpinned by long-term PPAs and the low operation risks of solar power.
All of SUPER’s power plants have multi-year PPAs with state-owned producers and distributors of electricity. The payment risk of the power buyers in Thailand is minimal, while that in Vietnam is higher.
Overseas projects to be key growth drivers
As growth opportunities in the domestic market have languished, SUPER has made overseas expansion, the main thrust of its business strategy. The company is committed to develop several large-scale renewable power projects in Vietnam.
Despite a tight timeline, SUPER recently completed the development of its first four solar power projects in Vietnam. All of the projects started commercial runs in June 2019, with a combined capacity of 186.72 MW. The company expects the remaining solar project (50 MW) to commence operation by the end of 2019. SUPER will further grow its footprint in Vietnam. It plans to add at least 422 MW of capacity from wind power projects, which are slated to commence operations in 2021.
In all, TRIS Rating expects the aggregate contracted capacity of the company’s operating power plants to reach 1,400 MW in the next three years. Total operating revenue is forecast to increase to Bt8.7 billion in 2022, from Bt6.2 billion in 2019. EBITDA (earnings before interest, taxes, depreciation, and amortization) should surpass Bt6.0 billion in 2022.
Solid operating performance
SUPER’s proven record in managing several operating solar power plants at high efficiency is a plus to the rating. The performance of SUPER’s solar power plants has been satisfactory. Since inception, the actual annual outputs of most of the company’s solar power plants have reached initial estimates, based on a 75% probability (P75 level) of energy production.
SUPER also maintains efficient cost control. As a result, the EBITDA margin (EBITDA as a percentage of revenues) has held at a high level of above 80% over the past three years.
Looking ahead, SUPER’s power portfolio could begin to deliver a lower EBITDA margin as tariffs for new power projects tend to decline in the wake of market competition. SUPER also plans to expand its waste-to-energy (WTE) projects, which generally yield lower margins than solar power projects. Moreover, the power projects in Vietnam are exposed to a risk of curtailments. That said, TRIS Rating expects the EBITDA margin to remain high at above 75% over the next three years.
Execution risks associated with projects in Vietnam
On the negative side, SUPER’s growth strategy will enlarge the company’s exposure to country risk. When all the projects in Vietnam are fully on stream, they may represent half of SUPER’s power portfolio in terms of contracted capacity. Despite fast-growing demand for electricity and the government’s supportive measures, power projects in Vietnam carry several risks, including changes in regulations, contract enforcement, insufficient infrastructure, and construction delays. In addition, counterparty risk is higher. We view that the credit profile of the state-run Vietnam Electricity (EVN) is not as strong as the Thai state-owned power buyers.
Furthermore, the national power grid in some provinces, especially Binh Thuan and Ninh Thuan, is facing overcapacity. As a result, SUPER’s solar power plants, such as the Sinenergy project (50 MW), are susceptible to curtailments. The Vietnamese government plans to enhance grid capacity to absorb the growing power production. However, the upgrade could not be achieved earlier than 2022. Taking this into considerations, we arrive at a conservative base-case forecast that substantially cuts the annual outputs of SUPER’s solar power plants in the two provinces (136.72 MW) over the next three years.
Large-scale expansion continues
The rating is constrained by the company’s large-scale expansion. SUPER will continue to grow considerably over the next three years. In addition to solar and wind power, it aims to increase its WTE capacity by 23 MW with three new projects in the pipeline. WTE projects generally carry higher operational risks than solar power plants. In addition to the environmental impacts inherent in the generation process, the company has to grapple with inventory risk arising from fluctuations in supplies and prices of feedstock. SUPER has also recently moved into a new area of business, acquiring a 100% stake in Super Water Co., Ltd., which holds a concession to sell raw and tap water. However, we expect the water production and distribution business will remain small in the coming years.
SUPER’s rapid growth could saddle the company with a heavy debt burden and impede free cash flow. Projects under development require a total investment of about Bt31 billion. Maintaining strong operating performance could be a challenge for the company with such as a large-scale expansion.
Infrastructure fund enhances financial capability
In August 2019, SUPER successfully established an infrastructure fund, which helps enhance its capacity for future investments. SUPER sold a pool of its solar power projects (118 MW) to Super Energy Power Plant Infrastructure Fund (SUPEREIF). The company reported gains on the sale of about Bt1.3 billion, receiving nearly Bt7 billion in net cash after its reinvestment in the fund. SUPER used the proceeds to repay loans worth about Bt4.2 billion, leaving the company with a cash pile of Bt3.6 billion as of September 2019. As a consequence, the debt to capitalization ratio fell to about 58% as of September 2019, from above 60% during the previous three years.
Potential surge in debt load
The massive investments should not raise SUPER’s leverage significantly until 2022. The projects in Vietnam come with Engineering Procurement and Construction (EPC) contractor financing. SUPER will pay most of the construction costs after the projects are operational. This mechanism should help keep the debt to capitalization ratio at around 60% during 2019-2021, before reaching 70% in 2022.
Based on our conservative forecast, the ratio of funds from operations (FFO) to debt could drop to 9%-10% during 2020-2022, from 12.3% in the first nine months of 2019. The ratio excludes the gains on the sale of assets to SUPEREIF, for comparative purposes. However, the FFO to debt ratio could be higher if the performance of the solar power projects in Vietnam beats our expectations.
As the company is likely to grow further, we believe that SUPER will be able to maintain its leverage at the expected level. Given the company’s wealth of power plants, SUPER has financial flexibility, with divestiture through the infrastructure fund being an option.
Liquidity stays manageable
TRIS Rating believes SUPER will be able to manage its liquidity properly. FFO should be sufficient to repay the annual long-term debt repayment. Over the next three years, FFO is assumed to range around Bt3-Bt4 billion per annum, whereas the annual long-term debt repayment is in the Bt2-Bt3 billion range. As of September 2019, SUPER also had undrawn credit facilities, plus cash and marketable securities, of about Bt4.1 billion, as additional sources of liquidity.
SUPER and its subsidiaries have financial covenants on their bank loans and debentures. SUPER is required to maintain a debt service coverage ratio above 1.2 times and keep the interest-bearing debt to equity ratio below 3 times. Its subsidiaries are required to maintain a debt service coverage ratio above 1.1 or 1.2 times and keep the interest-bearing debt to equity ratio below 2.5 or 3.0 times. SUPER and its subsidiaries comply with the respective financial covenants.
BASE-CASE ASSUMPTIONS
• Aggregate capacity of operating power plants to reach 1,400 MW in the next three years.
• Total operating revenues to range around Bt6.7-Bt8.7 billion during 2020-2022.
• EBITDA margin to be at least 75%.
• Projects in the pipeline require total capital spending of Bt31 billion.
• SUPER obtains long credit terms from its EPC contractors for construction of new projects in Vietnam.
• Annual outputs of some solar power plants in Vietnam are substantially cut.
RATING OUTLOOK
The “positive” rating outlook reflects the company’s success in developing large-scale solar power projects in Vietnam, SUPER’s first overseas investments, which commenced operations within tight deadlines. The outlook embeds our expectation on the satisfactory performance of SUPER’s overseas power projects in the years ahead.
RATING SENSITIVITIES
A rating upgrade could occur if the solar power plants in Vietnam perform satisfactorily, as expected. In contrast, the rating could be lowered if the performances of the power projects undershoot initial estimates or respective guidance. A downward rating pressure could also emerge if the capital structure deteriorates significantly, possibly due to a failure to generate sufficient cash flow, excessive debt-funded investments, or project cost overruns.
COMPANY OVERVIEW
SUPER was founded as a producer of Autoclaved Aerated Concrete in 1994 and listed on the Stock Exchange of Thailand (SET) in 2005. The company discontinued the original business and sold it to Siam City Cement PLC (SCCC) in 2013. SUPER then began two new businesses: information and communication technology (ICT) and renewable energy. SUPER entered the water production and distribution business in 2019. Currently, the power segment is the centerpiece of the company, accounting for nearly all revenues. As of September 2019, the Lochaya Group remained the major shareholder, holding a 37.5% interest in SUPER.
Currently, SUPER’s aggregate contracted capacity, spread across all the operating power projects, is 759 MW. This includes solar power projects (750 MW) and WTE projects (9 MW). SUPER holds the largest capacity among the solar power producers rated by TRIS Rating.
All power plants have multi-year PPAs with state-owned producers and distributors of electricity, namely the Electricity Generating Authority of Thailand (EGAT), rated “AAA” by TRIS Rating, the Metropolitan Electricity Authority (MEA), the Provincial Electricity Authority (PEA), rated “AAA” by TRIS Rating, and Vietnam Electricity (EVN).
TRIS Rating Co., Ltd./www.trisrating.com Contact: santaya@trisrating.com, Tel: 0-2098-3000/Silom Complex Building, 24th Floor, 191 Silom Road, Bangkok 10500, Thailand ? Copyright 2019, 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.