TRIS Rating affirms the company rating on Amata B.Grimm Power (Rayong) 1 Ltd. (ABPR1) at ?A-? with a ?stable? outlook. The company rating incorporates ABPR1?s stand-alone credit profile (SACP) of ?a-? and its status as a strategic subsidiary of B.Grimm Power PLC (BGRIM, rated ?A/Stable?).
The SACP reflects reliable cash flow from ABPR1?s long-term power purchase agreement (PPA) with the Electricity Generating Authority of Thailand (EGAT) and a strong record of power plant performance. Contrarily, the company rating is constrained by the risk of reliance on its single operating asset.
Key Rating Considerations
Reliability of earnings backed by long-term PPA with EGAT
ABPR1?s combined cycle cogeneration power plant is operated under the Small Power Producer (SPP) scheme to sell electricity to EGAT, with contracted capacity of 90 megawatts (MW). ABPR1 holds a 25-year PPA, which is on take-or-pay basis. EGAT is obliged to dispatch at least 80% of the contracted capacity, based on plant operating hours. ABPR1?s electricity sales to EGAT generally represent about 75%-80% of total sales. As a result, the market risk is largely mitigated while the counterparty risk is very low. The reliability of earnings also comes after the capacity payments. Moreover, the adverse impact from volatile fuel price and exchange rate is mitigated through the index-based tariff adjustment.
Offtake agreements with industrial customers
ABPR1 also sells electricity and steam to industrial customers in Amata City (Rayong) Industrial Estate (ACRIE). The company holds multi-year offtake agreements, covering 33.8 MW of electricity and 14 tons per hour of steam. Each industrial customer is obliged to purchase minimum amount of electricity and/or steam as agreed in its respective agreement. The sale volume is driven by demand, which is tied to industrial activity levels.
Higher electricity sales to industrial customer
For the first nine months of 2022, electricity sales to industrial customers totaled 146 gigawatt-hours (GWh), a 19% increase from 123 GWh year-on-year (y-o-y). This was mainly owed to ABPR1 fully recognized sales volume from a new industrial customer which started offtake in May 2021. However, the increased electricity sales were partially offset by lower demand of existing customers.
A streak of strong plant performance
ABPR1's combined cycle cogeneration power plant utilizes proven combined-cycle natural gas-fired generation based on two gas turbine engines supplied by Siemens, a leading manufacturer and supplier for power generation in global market. The company has its own operation and maintenance teams for day-to-day operations. The teams leverage BGRIM?s expertise in the operation and maintenance of cogeneration power plants. ABPR1 also holds a long-term service agreement (LTSA) with Siemens, which has been extended until 2035. The extended LTSA covers the next two major overhaul cycles of the power plant, helping ABPR1 achieve high availability factor and efficiency.
Since the outset, ABPR1 has performed in accordance with operational expectations under the PPA. For the first nine months of 2022, the plant?s actual availability factor was 99%. The heat rate was 7,559 British thermal units/kilowatt-hour (BTU/kWh), well below the borderline of 8,000 BTU/kWh as required by the PPA with EGAT. In terms of energy efficiency, the ABPR1 plant achieved the primary energy saving (PES) expectation and received an additional tariff of THB0.36/kWh from EGAT as a fuel-saving (FS) payment. We consider the risk of performance penalties and PPA termination is very limited.
Exposure to fuel price risk
In selling electricity to industrial users, ABPR1 is susceptible to fuel price risk in the event of surging gas prices. The company sells electricity to the industrial customers at discounts on tariff rates charged by the Provincial Electricity Authority (PEA) to large general service customers. The tariffs generally carry a fuel adjustment charge, or Ft. However, the Ft adjustment carries a time lag and is subject to the authorities? discretion on the timing and magnitude of the adjustments. Hence, a surge in fuel prices could significantly undercut the company?s earnings.
Weakened earnings from mounting fuel cost
ABPR1 was materially affected by the surge in fuel cost during 2022. Gas prices soared to a record of above THB550 per metric million British thermal unit (MMBTU) in the third quarter of 2022, due to the post-pandemic reviving demand and the prolonged Russia-Ukraine conflict. Meanwhile, the adjustment of Ft did not keep pace with the rise in fuel cost. Ft for the four-month period from September to December 2022 was raised to THB0.9343 per kWh. In effect, we estimate ABPR1?s earnings before interest, taxes, depreciation, and amortization (EBITDA) to shrink to below THB500 million in 2022, from THB698 million in 2021. The debt to EBITDA ratio is expected to increase to 5 times.
Earnings expected to recover
We project ABPR1?s earnings to recover, given our expectation of further Ft upward adjustments and normalized gas prices. In our base-case projection, we assume gas prices to remain high in 2023. At the same time, we expect Ft to continue to increase in 2023 to make up for the hefty subsidy of electricity charges incurred by EGAT. For the first four months of 2023, Ft for the large electricity users has been adjusted to THB1.5492 per kWh. In anticipation of easing demand-supply imbalance, we expect gas prices to steadily normalize from 2024 onwards while Ft will be adjusted accordingly. In our base case, we forecast ABPR1?s EBITDA to hover around THB650-THB720 million per year during 2023-2025, with the debt to EBITDA ratio to decline to 2-3 times over the forecast period, and the debt to capitalization ratio to reduce towards 50%.
Single operating asset
The rating is constrained by ABPR1's single operating asset. ABPR1?s business risk is relatively higher than those of large-scale power companies with multiple power-generating assets. Given the lack of operational diversification, its earnings could be at risk of major disruptions from unforeseen events, such as prolonged outage, or damage to key parts of machinery. However, we view the likelihood of such scenario is remote, given the proven track record of operation and the supportive LTSA.
Satisfactory debt service capability
In April 2017, ABPR1 borrowed an inter-company loan of THB3.88 billion from Amata B.Grimm Power SPV1 Ltd. (ABPSPV). The proceeds were used to refinance an outstanding bank project loan. The repayment schedule of the inter-company loan matches the maturity of the bonds issued by ABPSPV. ABPR1?s debt service obligations vary significantly from year to year. Debt services range from THB15 million to THB749 million per year during 2018-2032 with no principal repayments called for in 2018, 2019, 2025, and 2031. The first principal repayment was made in April 2020. We expect ABPR1 to manage its liquidity needs and reserve cash for the years in which large principal repayments are scheduled to be made.
As of September 2022, ABPR1 had cash on hand and cash equivalents of THB257 million. The available cash and cash equivalents, combined with the forecast EBITDA should be sufficient to cover the scheduled debt services of THB86-THB410 million per year during 2023-2025.
Guarantee obligation to ABPSPV?s debentures
ABPR1 is one of the guarantors of the guaranteed debentures issued by ABPSPV. The other two guarantors of the debt issue are Amata B.Grimm Power 3 Ltd. (ABP3) and Amata B.Grimm Power (Rayong) 2 Ltd. (ABPR2). Under the terms of the guarantee, the guarantors jointly and severally provide unconditional and irrevocable guarantees on all amounts due under the debentures, including the principal amount of up to THB11.5 billion, interest accrued thereon, and related expenses.
Strategic subsidiary under BGRIM Group
ABPR1 is one among 19 cogeneration power plants under BGRIM Group. As of September 2022, ABPR1?s installed capacity accounted for 5% of total capacity of BGRIM?s gas-fired cogeneration power plants. In terms of cash flow contribution, ABPR1?s EBITDA represents approximately 5% of the group?s total EBITDA. Notwithstanding its small revenue contribution, we view ABPR1 as a strategic subsidiary of BGRIM. In our view, the cogeneration power plants are the centerpiece of BGRIM?s power portfolio, representing 74% of BGRIM?s total power generation capacity.
BGRIM has five cogeneration power plants in ACIRE, including ABPR1. We view ABPR1 is important to BGRIM in managing overall operating efficiency of the group?s power plants in ACRIE. Based on this, we expect ABPR1 will obtain parental support in a distress scenario.
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BASE-CASE ASSUMPTIONS
These are the key assumptions in TRIS Rating?s base-case forecast for ABPR1?s operations during 2023-2025:
? The plant availability factor to be in the range of 92%-99%.
? PPA with EGAT to be 90 MW, PPAs with industrial customers to be 33.8 MW, and steam purchase agreements with industrial customers to be 14 tons/hour.
? Annual electricity sales to be 803-852 GWh and annual steam sales of 48-60 kilotons.
? Capital expenditure to be THB7-THB19 million per year.
? The inter-company loan repayment to be made according to repayment schedule of the guaranteed debentures issued by ABPSPV.
RATING OUTLOOK
The ?stable? rating outlook embeds our expectation of a recovery in ABPR1?s earnings. Over the long term, ABPR1 should be able to sustain its strong operational efficiency. The company?s earnings and leverage levels will be in line with our forecast.
RATING SENSITIVITIES
The prospect of a rating upgrade for ABPR1 is limited. Contrarily, negative pressures on the rating would emerge in case of a sustained deterioration of ABPR1?s operating performance. Downward revision to the rating may also develop in the event of its worsening debt service capability.
According to TRIS Rating?s ?Group Rating Methodology?, a material change in the credit profile of BGRIM or a material change in the linkage between ABPR1 and BGRIM could also impact the company rating on ABPR1.
COMPANY OVERVIEW
ABPR1 was established in 2011 to own and operate a cogeneration power plant under the SPP scheme. Located in ACRIE, Rayong Province, ABPR1's power plant commenced commercial operations on 1 November 2013. The power plant has an installed capacity of 123.3 MW plus 30 tons per hour of steam. ABPR1 has a 25-year PPA with EGAT, covering 90 MW while it has multi-year off-take agreements with industrial customers in ACRIE to sell 33.8 MW of electricity and 14 tons per hour of steam. The contracts with the customers in the industrial estate specify the minimum amounts of electricity and/or steam each customer is obligated to purchase.
ABPR1's combined cycle cogeneration power plant employs proven technology from Siemens. The Siemens SGT 800 gas turbine has a proven track record, with more than 100 units sold worldwide since 1997. ABPR1's power plant comprises two gas turbine units with bypass stacks, two heat recovery steam generators, and one steam turbine. The gas turbines and the steam turbine are all made by Siemens.
ABPR1 has entered into the LTSA with Siemens. Siemens will provide maintenance services, including spare parts and performance upgrades, for the gas turbine units. The collaboration between Siemens and BGRIM will help ensure the reliability of the turbines and keeps maintenance costs under control. ABPR1 has a 25-year gas supply contract with PTT PLC and a long-term water supply agreement with AMATA Water Co., Ltd. Moreover, the company has a contract with the PEA to purchase backup power in the event of an emergency.
As of September 2022, ABPR1's shareholders were BGRIM (61.7%), Sunrise Energy Co., Ltd. of the Sumitomo Group (SSEC -- 18.6%), Amata Corporation PLC (AMATA --16.6%), and B.Grimm Joint Venture Holding Ltd. (BGJV -- 3%). The major shareholder, BGRIM, was established in 1993 as a holding company for the power business under the conglomerate of the BGRIM Group. BGRIM generates and sells electricity and steam through its subsidiaries and affiliates. As of September 2022, BGRIM had installed capacity of 3,379 MW in operation.
RELATED CRITERIA
- Group Rating Methodology, 7 September 2022
- Corporate Rating Methodology, 15 July 2022
- Key Financial Ratios and Adjustments for Corporate Issuers, 11 January 2022
Amata B.Grimm Power (Rayong) 1 Ltd. (ABPR1)
Company Rating: A-
Rating Outlook: Stable