TRIS Rating affirms the company rating on Absolute Clean Energy PLC (ACE) at ?BBB+? with a ?stable? rating outlook. The rating reflects the company?s stable cash flow from long-term power purchase agreements (PPAs) with state-owned utilities under the small and very small power producer (SPP and VSPP) schemes, and satisfactory operating performance of its power plants. In contrast, the rating is partly constrained by the increase in leverage during the company?s expansion phase and its development risks associated with new power projects in the pipeline.
KEY RATING CONSIDERATIONS
Predictable cash flow from long-term PPAs
ACE?s power portfolio mostly has long-term PPAs with the Electricity Generating Authority of Thailand (EGAT) and the Provincial Electricity Authority (PEA).
As of June 2022, ACE owned and operated 22 power plants across Thailand with a total capacity of 257.6 megawatts (MW). Thirteen biomass power plants account for 49% of ACE?s power portfolio while one gas-fired combined cycle cogeneration power plant accounts for 44%. The remaining 7% is spread across two municipal solid waste (MSW) power plants, five solar rooftop projects, and one solar floating project.
The PPAs of biomass power plants under the VSPP scheme carry a fixed feed-in tariff (FiT) of THB2.39 per kilowatt-hour (kWh) and variable FiT of THB1.85 per kWh, which is linked to the core inflation rate. PPAs also carry a premium FiT of THB0.3 per kWh for the first eight years.
The cogeneration power plant is secured by a 25-year PPA with EGAT under the SPP scheme. The contract covers a capacity of 90 MW. Under the terms of a standard PPA for an SPP cogeneration power plant, EGAT agrees to dispatch at least 80% of the contracted capacity, based on plant operating hours. The PPA is on a take-or-pay basis, which stabilizes the cash flow. In addition, the PPA contains a formula that includes adjustments for changes in fuel prices and currency exchange rates. This largely mitigates the risks associated with changes in fuel price and currency fluctuations.
Mitigations of feedstock supply risk
ACE?s biomass power plants were designed to accept a wide range of feedstock types, such as woodchips, wood bark, and a variety of agricultural residues. Woodchip and wood bark are the primary fuels used in ACE?s biomass power plants, accounting for 60%-70% of total fuel consumption. The remainder comprises other agricultural residues.
Biomass feedstock is prone to fluctuations in supply and prices. ACE?s biomass power plants are located near sources of biomass feedstock to easily secure feedstock supply and limit transportation cost. ACE also mitigated feedstock risks by leveraging its major shareholders? expertise in eucalyptus plantation and wood chip businesses. ACE?s biomass power plants have secured long-term supply agreements with related companies to ensure the availability of woodchip and eucalyptus wood bark.
During the past three years, the average fuel cost for ACE?s biomass power plants ranged between THB1.45-THB1.63 per sold kWh during 2019-2021.
Satisfactory operating performance
ACE?s biomass power plants have recorded satisfactory operating performance during 2019-2021. Most biomass power plants had an availability factor between 84.9%-99.8% while the forced outage factor was around 0.1%-6.6% in the same period. However, two biomass power plants that ACE acquired in 2020 remained under maintenance with an availability factor between 50.7%-70.4%. The electricity dispatch factor during 2019-2021 ranged between 95%-99% of the contracted capacity.
ACE?s cogeneration power plant has met the targets specified in the PPA since the plant started up in 2017. The availability factor has ranged from 96.6%-99.5% with low forced outage factor. The heat rate ranged from 7,366-7,407 British thermal units per kilowatt-hour (BTU/kWh), better than the threshold of 7,950 BTU/kWh specified in the PPA.
ACE?s MSW power plants had a decent performance. During 2019-2021, the plants? average availability factor was 89%-96% with an average forced outage factor of below 0.7%-2.2%. The electricity dispatch factor remained at 98.9%-99.9% of the contracted capacity over the same period.
In the first six months of 2022, ACE?s revenue was THB3.3 billion, a 21% increase from the same period in the previous year. The increase in revenue was mainly due to the full period of operation of a newly commenced operation 9.9-MW biomass power plant in November 2021 and higher revenues of ACE?s gas-fired cogeneration power plant resulted from energy payment tariff adjustment to reflect higher gas prices. Earnings before interest, taxes, depreciation, and amortization (EBITDA) stood at THB1.2 billion, a 2% increase from the same period of previous year. Less EBITDA growth was caused by higher fuel prices and the increase in expenses from pre-operation expenses of new projects under development.
Numerous power projects under development
The rating is partly constrained by the development risks associated with the projects in the pipeline. Currently, the company is developing 34 power projects with a combined capacity of 270.8 MW. The projects consist of four power plants under the SPP hybrid program, 10 biomass power plants, two MSW power plants, and 18 biogas power plants. The company expects to start the operations of one SPP hybrid power plant by 2023. All biogas power plants are expected to commence operations in late 2025 and the biomass and MSW power plants in 2026-2027.
For our base case scenario, we expect new projects to bring in considerable cash flow to ACE from 2026 onward when the projects are fully operated. Thus, we project ACE?s EBITDA to remain between THB2.1-THB2.4 billion per year during 2022-2025.
Heightened financial leverage
ACE?s debt level will increase over the next several years due to its capacity expansion. In our base case assumption, we estimate ACE to spend up to THB17.3 billion to develop new projects during 2022-2025 which is largely funded by debt. Consequently, the company?s total debt is forecast to peak at THB15.5 billion in 2025, a considerable increase from THB5 billion at the end of June 2022. Debt to capitalization ratio is set to hover around 50% in 2025, up from 20.4% at the end of June 2022.
The leverage level in relation to cash generation will also rise during the period of expansion. The debt to EBITDA ratio is forecast to reach over 6 times in 2025, a jump from 1.5 times at the end of June 2022. However, the debt to EBITDA ratio could improve to 5 times when all projects commence operations.
Adequate liquidity
We expect ACE to adequately manage its liquidity over the next 12 months. Most of ACE?s debts are project finance loans for the power projects. As of June 2022, the company had cash of approximately THB1.5 billion. Funds from operations (FFO) over the next 12 months is forecast to reach THB2.2 billion. Sources of cash add up to THB3.7 billion, adequately covering long-term loans coming due over the next 12 months that total THB0.8 billion. ACE and its subsidiaries have complied with the respective financial covenants on their bank loans.
Capital structure
As of June 2022, ACE reported consolidated debt of THB5 billion, excluding financial lease. All the debt was at the subsidiary level, which is considered priority debt. The company?s priority debt to total debt ratio is 100%, well above the threshold of 50% according to TRIS Rating?s ?Issue Rating Criteria?, suggesting that ACE?s unsecured creditors are significantly disadvantaged to its priority debt holders with respect to claims against the company?s assets.
BASE-CASE ASSUMPTIONS
? Total power output to be 1,500-1,625 gigawatt-hour (GWh) per annum in 2022-2025.
? During 2022-2025, revenue to reach THB6.2-THB7 billion per year. EBITDA is projected at THB2.1-THB2.5 billion per year.
? Total capital expenditure to reach about THB17.3 billion over the forecast period in 2022-2025.
? Dividend payout ratio to be 30% each year.
RATING OUTLOOK
The ?stable? outlook reflects our expectations that ACE?s power plants will continue to run smoothly and generate reliable cash flow. We also expect the company?s projects under development to commence operation as planned.
?
RATING SENSITIVITIES
A rating upgrade could occur if the company is able to materially enlarge its cash flow from operation while prudently manage its debt to cash generation level on a sustained basis. Conversely, a rating downgrade could occur if ACE?s financial position weakens substantially, possibly from weakening capital structure from high debt-funded investments.
COMPANY OVERVIEW
ACE was founded in December 2015 as a holding company to invest in companies that own and operate power plants. The company was listed on the Stock Exchange of Thailand (SET) in November 2019. As of March 2022, ACE?s major shareholder was the ?Songmetta? family, owning 76% of the company?s shares.
ACE?s first power plant started operation in April 2012, a 9.9-MW biomass power plant in Chonburi province. During 2012-2019, ACE expanded its biomass power plant portfolio to include nine power plants, with a total capacity of 89 MW. In 2020, ACE acquired three biomass power plants from Ua Withya PLC (UWC) bringing biomass capacity to 116 MW. The PPA terms of the biomass power plants are 20 years. Most PPAs carry a fixed FiT of THB2.39 per kWh, core inflation-linked variable FiT of THB1.85 per kWh, and a premium FiT of THB0.3 per kWh for the first eight years.
The company owns and operates a 114.4-MW gas-fired cogeneration power plant in Chachoengsao province. ACE also owns two MSW power plants in Khonkaen and Krabi provinces, with a total capacity of 12 MW. Besides, ACE has five solar rooftop projects and one solar floating project. These solar projects have private PPAs with industrial users. The solar power projects tariffs are based on the PEA tariff with some percentage discount from the tariff.
As of June 2022, ACE had 34 projects under development in Thailand, consisting of 10 biomass power plants under the VSPP program, two MSW power plants, 18 biogas power plants under ?Community Power Plants for Local Economy Project? (Pilot Project) program, and four hybrid power plants under the SPP hybrid program. The company has 36 months from the PPA date to develop and commence operation of the biogas power plants.
RELATED CRITERIA
- Corporate Rating Methodology , 15 July 2022
- Key Financial Ratio and Adjustments for Corporate Issuers, 11 January 2022
Absolute Clean Energy PLC (ACE)
Company Rating: BBB+
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