TRIS Rating Co., Ltd. has assigned "A+" ratings to Eastern Water Resources Development and Management PLC (EASTW) and its proposed Bt1,300 and Bt1,200 million senior debentures. The ratings reflect EASTW's strong status as the main source of raw water in the Eastern Seaboard, which has shown strong water demand, a favorable trend that is expected to continue during the next three to five years. In addition, the ratings take into consideration EASTW's low operational risk, ownership that includes the Provincial Waterworks Authority (PWA) as the largest shareholder, a capable and experienced management team and predictable cash flow generation from existing projects. However, these strengths are partially offset by its large capital expenditure requirements during the next three years and risks associated with its new projects. Although the lack of long-term permit from the Royal Irrigation Department (RID) that allows EASTW to extract water from RID's three reservoirs is not a rating constraint, TRIS Rating will closely monitor the regulatory development that might impact water allocation for EASTW.
TRIS Rating reported that EASTW was established in 1992 following a Cabinet resolution to provide reliable raw water to meet the demand in the Eastern Seaboard. Initially, the PWA owned 100% of the shares in EASTW, but this was diluted to its current 44% stake after EASTW sold new shares to the Industrial Estate Authority of Thailand (IEAT) and the public. Although the PWA's ownership in EASTW will be reduced further after the completion of the capital raising scheme that it expects to finish by the end of 2004, the PWA will continue to be the largest shareholder of EASTW (40%) in the medium term. Ownership by the PWA, which is responsible for supplying tap water nationwide, excluding Bangkok, Nonthaburi and Samutprakarn, implicitly supports the operation of EAST in terms of knowledge sharing and helps enhance good relations between EASTW and other water-related responsible authorities.
TRIS Rating said that both IEAT and PWA are major customers of EASTW, contributing between 65%-72% of its operating revenue during the last three years. EASTW does not have long-term contracts with any customer, except for an independent power producer; however, risk of customer loss is considered low because of scarcity of alternative water resources. Although the government has not granted the company an exclusive concession to operate and manage raw water pipeline distribution systems in the Eastern Seaboard, barriers to entry in this business are extremely high. It is very difficult for new players to find water resources and to obtain rights of way for appropriate routes to establish another pipeline. Such barriers to entry have created a de facto monopoly status for EASTW to supply raw water in the seven provinces in the Eastern Seaboard.
EASTW has delivered favorable performance in the past because of increased demand for water in the Eastern Seaboard area, its de facto monopoly status in the raw water business and its capable and experienced management team. Management has implemented the Supervisory Control and Data Acquisition (SCADA) system to efficiently operate and manage EASTW's whole water pipeline distribution network to monitor the status of water on a real time basis including water flow, water transmission systems, water consumption by each customer, and maintenance. In 1993, EASTW entered into a 30-year lease contract with the Ministry of Finance to lease raw water distribution networks. Since then, the company has expanded its own water pipeline distribution system to serve increasing demand. Although all infrastructure EASTW uses is considered new, which means it will not need substantial capital expenditure for replacement, the company has aggressive expansion plans of around Bt2,500-Bt2,800 million per annum for the next three years to help it meet the burgeoning demand for water. This level of investment will cause EASTW's leverage and cash flow protection to weaken in the medium term and it will take some time before the benefits of these expansions have an effect on earning. EASTW's net debt to capitalization ratio increased to 26.6% in March 2004, with the majority of the debt being used to fund its expansion. Although this ratio is expected to deteriorate further because the large-scale investment over the next three years will be funded largely by debt, its leverage will remain at an acceptable level. EASTW's cash flow and earning are quite predictable, which is one of the key factors supporting its credit profile. Funds from operations (FFO) has continuously improved from Bt299 million in 1999 to Bt499 million in 2003. However, FFO to net debt has shown a declining trend and was at 47.5% as of September 2003 because cash generation was unable to catch up with the rapid capital expenditures required during the growth stage of the company, TRIS Rating said.-End
Eastern Water Resources Development and Management PLC (EASTW) Company Rating: A+ Issue Ratings: EAST087A: Bt1,500 million senior debentures due 2008 A+
EAST117A: Bt1,000 million senior debentures due 2011 A+