TRIS Rating Co., Ltd. has affirmed the "A+" ratings to Eastern Water Resources Development and Management PLC (EASTW) and its senior debentures with "stable" outlook. The ratings reflect EASTW's strong position as the main supplier 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 the company's low operational risk, ownership that includes the Provincial Waterworks Authority (PWA) as the largest shareholder, an 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 few years and risks associated with its new projects. Although the lack of a long-term agreement with the Royal Irrigation Department (RID) to allow EASTW to extract water from RID's three reservoirs is not a rating constraint, TRIS Rating will closely monitor the regulatory developments and water supply issues that might impact water allocation for the company.
The "stable" outlook reflects EASTW's ability to sustain stable cash flow generation due to high barriers to entry into its core raw water business and the de facto monopoly status of the company. TRIS Rating expects that the company will cautiously invest in large projects only after extensive study.
TRIS Rating reported that EASTW was established in 1992 following a Cabinet resolution to provide reliable supplies of raw water to the seven promoted provinces on the Eastern Seaboard. In 1993, the company entered into a 30-year lease contract with the Ministry of Finance (MOF) to lease raw water distribution networks that had been built and operated by various government-related entities. Although all infrastructures the company uses is considered new, the company has continued expanding its pipeline to meet the burgeoning demand for water and to increase distribution capacity. Hence, it has invested about Bt1,500 million in 2005 to lay more pipelines to source additional water supply, which also helped minimize the impact of the drought in July-August 2005. The pipeline investment will continue in 2006 with the estimated expenditure of approximately Bt2,600 million.
TRIS Rating said, EASTW has delivered favorable performance in the past, not only because of increased demand for water in the Eastern Seaboard area and its de facto monopoly status in the raw water business, but also due to 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. On a real time basis, SCADA helps operators monitor the status of water flow, water transmission systems, water consumption by each customer, and maintenance.
Both PWA and Industrial Estate Authority of Thailand (IEAT) are major customers of EASTW, contributing an average of 65% of EASTW's raw water revenue during the last five years. The company does not have long-term contracts with any customer, except for one 20-year contract with an independent power producer; however, risk of customer loss is considered low because of the scarcity of alternative water resources. Although the government has not granted EASTW 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 of the Eastern Seaboard.
EASTW's quite predictable cash flow and earnings is one of the key factors supporting its credit profile. The operating margin before depreciation and amortization was very high at over 50% in the past, but it might drop below 50% in FY2005 due to the increasing electricity cost and when combined with the performance of its water-related businesses, i.e. tap water and water pipe. While EASTW's net debt to capitalization has been very low during the past, however, the company is expected to incur additional debt in 2006 to fund its planned capital expenditure. Hence, EASTW's leverage and cash flow protection will weaken in the medium term and it will take some time before the benefits of these expansions have an effect on earnings, said TRIS Rating. - End
Eastern Water Resources Development and Management PLC (EASTW) Company Rating: Affirmed at A+ Issue Ratings: EASTW087A: Bt1,300 million senior debentures due 2008 Affirmed at A+
EASTW117A: Bt1,200 million senior debentures due 2011 Affirmed at A+ Rating Outlook: Stable