TRIS Rating affirms the company rating on Metropolitan Electricity Authority (MEA) at ?AAA? with a ?stable? rating outlook. The rating reflects MEA?s integral linkage with the Thai government and its critical role as a state-owned enterprise (SOE) responsible for distributing electricity in the central cities of Thailand. The rating also takes into consideration the robust demand from its service areas, reliable cash flow under the cost-plus tariff structure, solid financial profile, and conservative financial policy.
KEY RATING CONSIDERATIONS
Integral linkage with the government
TRIS Rating assesses MEA?s link with the government as being integral. MEA is wholly owned by the Thai government, via the Ministry of Finance, and operates under the supervision of the Ministry of Interior. The government can exert strong influence on MEA?s strategy through the appointment of board members and the governor.
We believe that MEA will receive timely and sufficient extraordinary support from the Thai government if MEA?s income is inadequate in meeting its operating expenses and debt service payments as stated in MEA Act B.E.2501.
Critical role in distributing power in Thailand?s metropolitan area
MEA is one of the two state-owned enterprises distributing electricity to the retail markets in Thailand. MEA is responsible for three central provinces: Bangkok, Samut Prakan, and Nonthaburi. Another SOE, Provincial Electricity Authority (PEA) (rated ?AAA? by TRIS Rating), covers the remaining 74 provinces.
MEA?s credit profile reflects its critical importance to the government and the electricity distribution system in Thailand. The crucial mission of MEA is to ensure the reliability of the power system in Bangkok, Nonthaburi, and Samut Prakan provinces, which consume about 26%-27% of the electricity used in the country. MEA also has the responsibility of formulating strategic plans to support national policy and the development of electricity supply systems in Thailand.
In 2021, MEA?s service areas covered about 3,192 square kilometers. The authority operates a distribution network with a line-length of 53,660 circuit-kilometers. MEA?s revenue was THB187 billion, while the distributed electricity amounted to 49,561 gigawatt-hours (GWh). MEA purchases almost all of its electricity from the Electricity Generating Authority of Thailand (EGAT).
Robust electricity demand in the metropolitan area
MEA benefits from its services in urban areas, where electricity consumption has been substantial and consistent for over a decade. The distributed electricity was 49,561 GWh in 2021, compared to 44,167 GWh in 2011, representing an average growth rate of 1.2% per annum.
We view that a large number of consumers and diversified customer types in the metropolitan area as positive factors in enhancing MEA?s revenue stability. MEA?s customers have increased by about 2.8% annually over the last ten years, reaching approximately 4.11 million in 2021. MEA?s revenue also benefits from the high selling price of electricity, backed by population density and high electricity consumption per user.
Stable earnings from cost-plus tariff structure
The electricity tariff structure plays a vital role in protecting MEA?s operations from the risk of electricity procuring costs. The electricity tariff structure in Thailand, regulated by the Energy Regulatory Commission (ERC), is designed to cover essential investments, and ensure adequate funds for the operations of all three power-related state enterprises: EGAT, PEA, and MEA. The tariff structure incorporates a variable adjustment mechanism or Ft to pass any changes in electricity costs to end consumers.
Under this tariff structure, we believe that MEA?s business can generate sufficient earnings with a highly stable profit margin. MEA?s gap between the electricity selling and the purchasing prices is relatively steady. During 2017-2021, the spread between the selling and purchasing electricity prices was around THB0.99-THB1.03 per kilowatt-hour (kWh).
Regulated return caps profitability
MEA?s profit margin is capped by the regulations as MEA is obliged to return excess revenues to related authorities until its financial status meets the criteria set by ERC. Since MEA benefits from servicing in metropolitan areas and usually generates a significantly higher return than PEA?s, ERC requires MEA to allocate part of its revenue to subsidize PEA and set aside any excess amount after the cross-subsidy, termed ?clawback?, to support the government measures.
During 2018-2021, MEA has transferred its surplus revenue, including that transferred to PEA and clawback, at around THB16.6-THB19.6 billion per year. With this mechanism, we assess MEA?s earnings before interest, taxes, depreciation, and amortization (EBITDA) margin as being limited to 8%-10%.
MEA?s performance to normalize from 2022 onwards
A recovery of electricity consumption following a gradual improvement of the COVID-19 situation underpins our expectation of improving results from 2022 onwards. Electricity demand in MEA?s covered areas increased by 3.1% year-on-year (y-o-y) in the first six months of 2022 after a 2.2% contraction in 2021. MEA is less likely to incur material expenses to support government relief measures during 2022. We assess that an upward adjustment of the Ft following a surge in energy prices should have little impact on MEA?s profitability under the cost-plus tariff scheme.
In our base-case forecast, given an upward adjustment of the Ft, MEA?s revenue is likely to escalate from THB220 billion in 2022 to THB257 billion in 2024. MEA?s EBITDA margin remain around 8%-9%, reflecting EBITDA of THB20-THB21 billion per annum over the next three years.
Strong financial profile
In our assessment, MEA?s financial status remains adequately strong for its planned investment expenditures. We expect MEA?s total debt will increase at an accelerating pace as MEA?s annual capital expenditures escalate from THB22 billion in 2022 to THB32 billion during 2024-2025, mainly for improvements to distribution line and underground cable projects. Nonetheless, its growing EBITDA should help balance its debt to cash flows ratios, keeping its financial status solid. Over the next three years, we forecast MEA?s net debt to EBITDA ratio to stay between 3-4 times and the debt to capitalization ratio to be in the range of 35%-45%.
Conservative financial policy
MEA has consistently adopted a conservative financial policy. The policy involves maintaining a debt to equity ratio of not more than 1.5 times, a self-financing ratio of not less than 25%, and a debt service coverage ratio of not less than 1.5 times.
MEA?s liquidity is well-managed, as assessed from its prudent cash reserve policy. MEA has established a sinking fund for the purpose of bond redemptions for the next three to four years. MEA also makes deposits for specific purposes such as an electricity usage guarantee, employee gratuity funds, and for clawback.
BASE-CASE ASSUMPTIONS
? MEA?s electricity sales to grow by 2.0%-2.5% per annum during 2022-2024.
? Revenue to grow from THB220 billion in 2022 to THB260 billion in 2024.
? EBITDA to stay between THB20-THB21 billion per annum in 2022-2024.
? Total capital expenditure to rise from THB22 billion per year to THB32 billion per year during 2022-2024.
? Remittances to the Thai government to be 50% of net profit.
RATING OUTLOOK
The ?stable? outlook reflects TRIS Rating?s expectation that MEA?s crucial role in distributing electricity will remain unchanged, and that MEA will receive timely and sufficient extraordinary support from the government if needed.
RATING SENSITIVITIES
A rating downside case may occur if there are changes in the government policy regarding MEA?s status and its role in the Thai power industry.
COMPANY OVERVIEW
MEA is a state enterprise under the supervision of the Ministry of Interior, established in 1958 under the MEA Act B.E. 2501. MEA is responsible for electricity distribution in three provinces: Bangkok, Nonthaburi, and Samut Prakan. The organization?s area of responsibility covers 3,192 square kilometers. In 2021, about 4.11 million users were connected to its distribution network.
The bulk of electricity consumption in 2021 came from large general service users (34% of total electricity sales), followed by small and medium general service users (29%) and residential users (32%). The remainder (5%-6%) came from specific business service users, government institutions, non-profit organizations, and others.
RELATED CRITERIA
- Corporate Rating Methodology , 15 July 2022
- Key Financial Ratio and Adjustments for Corporate Issuers, 11 January 2022
- Government-Related Entities Rating Methodology, 30 July 2020
Metropolitan Electricity Authority (MEA)
Company Rating: AAA
Rating Outlook: Stable TRIS Rating Co., Ltd./www.trisrating.com Contact: santaya@trisrating.com, Tel: +66 0 2 098 3000/Silom Complex Building, 24th Floor, 191 Silom Road, Bangkok 10500, Thailand ? Copyright 2022, 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 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 www.trisrating.com/rating-information/rating-criteria