TRIS Rating affirms the company rating on EDL-Generation Public Company (EDL-Gen) and the ratings on EDL-Gen’s senior unsecured debentures at “BBB”. At the same time, TRIS Rating revises the rating outlook on EDL-Gen to “negative” from “stable”.
This outlook revision follows the outlook revision of the sovereign rating on the Lao People’s Democratic Republic (Lao PDR). TRIS Rating revised the Lao sovereign rating outlook downward to “negative” from “stable” while affirming the Lao sovereign rating at “BBB” on 15 May 2020.
The “BBB” ratings continue to reflect EDL-Gen’s high integration with Electricite du Laos (EDL), the company’s major shareholder and the sole purchaser of the electricity EDL-Gen produces. EDL is a state-owned enterprise, owned by the government of the Lao PDR. As a result, EDL’s credit profile is underpinned by the sovereign rating of Lao PDR.
EDL-Gen’s ratings also take into consideration the company’s critical role in the electrical power industry in the Lao PDR. The ratings are constrained by the sovereign rating of the Lao PDR, the sizable investments EDL plans to make, and an oversupply of electricity in the Lao domestic market.
KEY RATING CONSIDERATIONS
Credit profile reflects EDL and Lao PDR’s sovereign credit worthiness
EDL-Gen’s credit profile is underpinned by the credit profiles of EDL and the Lao PDR. EDL-Gen is a core subsidiary of EDL. EDL-Gen took over the role of electricity generation for the country from EDL at its inception. On the other hand, EDL is the sole customer of EDL-Gen and the sole owner of the nation’s power grid. EDL-Gen is tightly integrated with EDL under the structure.
EDL influences EDL-Gen’s business direction in many ways, such as the pursuit of growth opportunities, the structure of future power purchase agreements (PPAs), and dividend policy.
EDL is wholly-owned by the Ministry of Finance of the Lao PDR (MOFL). The credit quality of EDL is underpinned by the very high likelihood that the government of the Lao PDR will provide full support to EDL in the event of distress. This likelihood is reinforced by the fact that EDL and EDL-Gen fulfill a critical role in the power development plan of the Lao PDR, and the power sector plays an important part in efforts to advance the economic and social development of the Lao PDR.
Strong market position in Lao PDR’s power sector
EDL-Gen is one of the leading power producers in the Lao PDR, with a 16.5% share of total installed capacity. For domestic power supply, EDL-Gen is the largest power producer, supplying about 22.6% of the power consumed in the Lao PDR.
EDL-Gen’s equity capacity increased significantly during 2019-2020. In 2019, EDL transferred to EDL-Gen, shareholdings in four Independent Power Producers (IPPs), equivalent to 350 megawatts (MW) (proportionate to shareholdings), EDL also transferred 80 MW of the Nam Ngum 1 expansion unit. In addition, Donsahong, an IPP hydroelectric power project that represents an equity capacity of 52 MW for EDL-Gen, commenced operation in December 2019. For 2020, EDL plans to transfer three hydroelectric power plants with total installed capacity of 187 MW to EDL-Gen. TRIS Rating expects EDL-Gen’s equity capacity to increase to 1,896 MW by the end of 2020 from 1,159 MW at the end of 2018.
Domestic oversupply to continue for several years
Based on preliminary data available to TRIS Rating, the installed capacity of all power plants in the Lao PDR increased to 9,972 MW at the end of 2019, from 7,080 MW at the end of 2018. Out of the total installed capacity, 5,961 MW are generated by IPPs for direct export, mainly to Thailand, while the remaining 4,011 MW are distributed by EDL for domestic use via EDL’s grid.
During the past few years, the power generation capacity for Laos’s domestic market has grown at a compound annual growth rate (CAGR) of 17.5%. Capacity jumped to 4,011 MW in 2019 from 2,105 MW in 2015. On the other hand, domestic demand for electricity has grown at a slower pace of 9.3% CAGR, rising to 1,085 MW in 2019 from 760 MW in 2015, resulting in an oversupply of 1,500-2,000 MW. EDL has tried to ease this situation by exporting electricity to neighboring countries such as Cambodia, Vietnam, Myanmar, and Malaysia, on a grid-to-grid basis. EDL is constructing a new backbone grid connecting the central region of the Lao PDR with the southern region, to facilitate the sale of electricity to Cambodia and Vietnam. The upgrade of the transmission line is expected to reach completion by 2021-2022, which means the oversupply situation is likely to continue for the next couple of years.
The domestic oversupply has strained EDL-Gen’s operating performance in terms of electricity sales. EDL has to purchase electricity from other domestic IPPs and may reduce electricity purchased from EDL-Gen to balance supply and demand, especially during the wet season. As many IPPs operate run-of-river power plants, they cannot reduce power output during the wet season, while some of EDL-Gen’s plants have reservoirs and are able to slow down operations during the wet season and maximize operations during the dry season.
Drought has impacted performance in 2019-2020
In 2019, EDL-Gen’s power generation was 25% off target, as a severe drought hit the northern region of the Lao PDR. Based on preliminary data available to TRIS Rating, EDL-Gen generated and sold 2,114 gigawatt-hours (GWh) of electricity to EDL. The shared profits from investments in IPP projects also declined to Kip339 billion in 2019 from Kip626 billion in 2018 due to low water inflows in the Lao PDR.
The drought situation in 2019 has resulted in the water level in EDL-Gen’s main reservoirs hitting its lowest point at the end of 2019. Electricity generation in 2020, from the existing projects, is therefore not expected to exceed the 2019 level. However, EDL transferred three power plants with a total capacity of 187 MW to EDL-Gen in February 2020. TRIS Rating forecasts that EDL-Gen’s revenue from electricity sales is likely to increase by 8% to about Kip1.3 trillion in 2020, thanks to the revenue from the new assets transferred from EDL.
Exposure to foreign exchange risk
EDL-Gen has continued to suffer from foreign exchange losses. The foreign exchange loss was due to the weaker kip compared with the US dollar and the Thai baht, as all of EDL-Gen’s debt is denominated in foreign currency. EDL-Gen will continue to be exposed to foreign exchange risk because of the currency mismatch of revenue and expenses. The majority (50%) of income EDL-Gen receives is denominated in Lao kip, followed by US dollars (46%) and Thai baht (4%), while its major obligations are mostly in US dollars and Thai baht.
At the end of 2019, the company reported a total debt of Kip13.9 trillion. Of the total, about 60% was denominated in US dollars, 39% in Thai baht, and 1% in euros and Japanese yen.
Moderate investment during 2021-2025
EDL-Gen has revised downward its investment plan. EDL-Gen has decided to delay investments in some IPP projects. During 2020-2023, EDL-Gen is expected to spend about Kip5 trillion to acquire 100% shareholdings in four of EDL’s power plants, purchase shares in two IPP projects from EDL, as well as invest directly in two IPP projects. EDL-Gen is also developing and constructing four hydroelectric power projects and one solar power project. Of the expected investment of Kip5 trillion, EDL-Gen has already paid an advance amount of about Kip2.2 trillion to EDL for equity stakes in several projects. EDL-GEN’s equity capacity during 2021-2025 is forecast to increase by 80 MW per annum, compared with the increases of 490 MW and 247 MW in 2019 and 2020, respectively.
Leverage continues to increase
Financial leverage is forecast to rise following the transfers of power plants from EDL during 2018-2020. The increase in leverage is mainly from the consolidation of the debts of several power plants transferred to EDL-Gen from EDL. TRIS Rating expects EDL-Gen’s debt to capitalization ratio to deteriorate to 63%-67% during 2020-2022, from 58.5 % at the end of 2019.
EBITDA to rise after 2021
Under TRIS Rating’s base-case scenario, EDL-Gen’s earnings before interest, tax, depreciation, and amortization (EBITDA) will increase to reach around Kip2-Kip2.1 trillion in 2022-2023 from Kip1.4 trillion in 2019 once EDL-Gen realizes the full benefits of the assets and shares in IPP projects purchased from EDL. By 2022, almost all of the power projects will have been in operation for a full year.
TRIS Rating forecasts the debt to EBITDA ratio of EDL-Gen to increase to around 11-12 times in 2020 from about 9.6 times in 2019. The ratio is expected to improve to a range of 8-10 times during 2021-2022. Based on the forecast levels of EBITDA and capital expenditures, EDL-Gen will need to refinance its Thai baht debentures coming due in 2021.
Adequate liquidity profile
TRIS Rating assesses EDL-Gen’s liquidity to be adequate over the next 12 months. Sources of funds comprise cash on hand of Kip1.1 trillion at the end of 2019. Funds from operations (FFO) over the next 12 months are forecast to be approximately Kip590 billion. EDL-Gen does not have bonds due in 2020. However, it does have long-term loans coming due of about Kip580 billion. The cash on hand plus the projected FFO should be sufficient to cover the loan repayments in 2020.
BASE-CASE ASSUMPTIONS
• EDL-Gen’s electricity sales to grow by 8% in 2020 to reflect the three new power plants in its portfolio.
• The oversupply and transmission line bottlenecks in the Lao PDR to begin easing in 2022.
• The operating margin (operating income before depreciation and amortization as a percentage of sales) to be above 80% during the forecast period.
• Capital expenditures during the period of 2020-2023 to be about Kip5 trillion. Expenditures include annual maintenance expenditures, the purchase of power plants from EDL, purchases of stakes in IPP companies from EDL, construction of new power plants, and investments in other IPP companies.
RATING OUTLOOK
The “negative” outlook reflects the outlook of the sovereign rating of the Lao PDR. TRIS Rating expects that the business model and the level of integration between EDL and EDL-Gen will remain unchanged, and that EDL will continue holding a majority stake in EDL-Gen and receiving support from the government of the Lao PDR.
RATING SENSITIVITIES
A change in the outlook to “stable” is dependent on the outlook for the sovereign rating of the Lao PDR. The upside and downside scenarios for EDL-Gen’s ratings are primarily tied to a change in the sovereign rating of the Lao PDR. EDL-Gen’s rating profile fully reflects the creditworthiness of EDL and the government of Lao PDR.
COMPANY OVERVIEW
EDL-Gen was founded in 2010 and listed on the Lao Securities Exchange (LSX) in 2011. The incorporation of EDL-Gen was part of the restructuring of the power sector in the Lao PDR, which called for EDL-Gen to purchase the current and future power generating assets from EDL. Before EDL-Gen was set up, EDL was the sole vertically integrated electric power utility, dominating all aspects of the sector in the Lao PDR, from power generation, transmission lines, and the distribution of electricity to end-users. EDL also owned stakes in several IPPs operating in the Lao PDR. Notwithstanding the transfer of its electricity generating assets to EDL-Gen, EDL remains the single buyer of electricity in the Lao PDR and the dominant electricity distributor. EDL owns almost all of the power grids in the Lao PDR.
As of March 2020, EDL held a 75% stake in EDL-Gen. EDL-Gen owns and operates hydropower assets developed by EDL. EDL-Gen also invests in IPP hydropower projects previously held by EDL. Each of EDL-Gen’s power generating asset operates under a PPA and concession covering 30 years.
As of March 2020, EDL-Gen’s aggregate equity capacity was 1,836 MW, comprising 886 MW from its 13 wholly-owned hydropower plants and 950 MW from equity investments in 14 IPPs and one solar power project.
RELATED CRITERIA
- Rating Methodology – Corporate, 26 July 2019
- Key Financial Ratios and Adjustments, 5 September 2018
- Group Rating Methodology, 10 July 2015
- Sovereign Credit Rating, 8 October 2013
EDL-Generation Public Company (EDL-Gen)
Company Rating: BBB
Issue Ratings:
EDLGEN217A: Bt3,810.3 million senior unsecured debentures due 2021 BBB
EDLGEN21DA: Bt2,000 million senior unsecured debentures due 2021 BBB
EDLGEN227A: Bt1,085.5 million senior unsecured debentures due 2022 BBB
EDLGEN237A: Bt4,078.1 million senior unsecured debentures due 2023 BBB
EDLGEN247A: Bt1,660.7 million senior unsecured debentures due 2024 BBB
EDLGEN24DA: Bt3,000 million senior unsecured debentures due 2024 BBB
EDLGEN257A: Bt1,443.1 million senior unsecured debentures due 2025 BBB
EDLGEN287A: Bt1,897.9 million senior unsecured debentures due 2028 BBB
EDLGEN307A: Bt809.8 million senior unsecured debentures due 2030 BBB
EDLGEN311A: Bt1,093.4 million senior unsecured debentures due 2031 BBB
EDLGEN337A: Bt1,621.2 million senior unsecured debentures due 2033 BBB
EDLGEN239A: US$51 million senior unsecured debentures due 2023 BBB
EDLGEN269A: US$166 million senior unsecured debentures due 2026 BBB
EDLGEN289A: US$95 million senior unsecured debentures due 2028 BBB
Rating Outlook: Negative