TRIS Rating Co., Ltd. has downgraded the company rating of National Power Supply Co., Ltd. (NPS) to “BBB” from “BBB+” with “stable” outlook. The downgrade reflects NPS’s operating performance which is weaker than expectation as a result of higher fuel costs and operating problems caused by increasing use of biomass fuel during the last several years. The company’s balance sheet and leverage level have deteriorated as a result of the group’s restructure and expansion plan. The rating, however, continues to be supported by reliable cash flow from long-term sales contracts with the Electricity Generating Authority of Thailand (EGAT) and the Double A Alliance Group (AA Group) under the Small Power Producer (SPP) scheme, healthy profitability from a biomass-fired power plant, and an experienced management team from the AA Group.
The “stable” outlook reflects TRIS Rating’s expectation that NPS will continue to receive reliable cash flow from its existing power plants. With the major overhaul completion and a preventive maintenance program now established, operating performance will be more stabilized. The huge investment burden and funding pressure during the next five years is expected to be alleviated by an equity injection from strategic partners for some power projects.
TRIS Rating reported that NPS is the leading operator of biomass power plants in Thailand. Currently, the company owns and operates two mixed fuel power generators with a total capacity of 328 megawatts (MW) under the SPP scheme. As a flagship power company of the AA Group and its proven track record of operating biomass-mixed power plants, NPS has been successfully awarded a number of SPP licenses and an Independent Power Producer (IPP) license from the government. The company’s total electricity capacity under development and acquisition is 1,175 MW. The power plants are located in 304 Industrial Park (304 IP) which belongs to the AA Group. The AA Group serves as NPS’s maintenance service provider, biomass supplier, and major customer. The power plants are designed to run on a mix of coal and biomass. Using a mix of biomass fuels, NPS manages to generate a higher operating margin than operators using conventional fuel, due to the comparatively low cost of biomass and an adder under SPP contracts. While this provides a cost advantage and flexibility in fuel selection, the biomass co-fired power plant causes greater operating risk.
NPS’s electricity revenue is 100% secured under 25-year Power Purchase Agreements (PPAs) with EGAT for 180 MW and a 15-year Power Sales Agreement with 304 Industrial Park Co., Ltd. (304IP) for 50-120 MW. The entire steam output is supplied to Advance Agro PLC (AA) under a 25-year contract. Over the past three years, sales to EGAT contributed about 40% of revenue while sales to 304IP and AA accounted for 50% and 10%, respectively. Coal, which is the main fuel, constituted about 70% of the total cost. NPS sources its coal partly from Marubeni Corporation under a 15-year Coal Supply Agreement. All biomass fuel is supplied by the AA Group under long-term contracts. In 2008, the cost of coal rose sharply while the Fuel Transfer Charge (Ft) lagged behind. The cost of coal then constituted approximately 60% of total revenue, up from 32%-35% in 2006-2007. In 2009, NPS decided to further solidify its coal supply by entering a long-term Coal Purchase Agreement with Glencore International AG and a one-year contract with Vietnam National Coal-Mineral Industries Group (Vinacomin). The price of the contracts is linked to the Japanese Power Utility (JPU) index. NPS is negotiating with Vinacomin to supply the same volume with the same conditions for 2010. Therefore, approximately 100% of the coal used in 2010 will be secured with the price link to the JPU index which is the same index used by EGAT.
TRIS Rating said, in 2008, NPS’s sales increased by 5.4% from the previous year to Bt5,682 million. However, net profit was seriously impacted from the extraordinarily high coal prices as well as higher interest expenses. Surging coal prices led to a 56% increase in fuel cost. Interest expenses also increased, rising to Bt830 million in 2008 from Bt534 million in 2007. The rise came in part as a result of increased financial cost recognized from related company loan of Bt4,977 million. Net profit plummeted to Bt33 million in 2008 compared with Bt936 in 2007. The operating margin before depreciation and amortization dropped to 21.3% in 2008 compared with over 40% in the past. The total debt to capitalization ratio remained high at 65.0% in 2008, from 66.1% in 2007. The funds from operations (FFO) to total debt ratio fell sharply to 5.5% in 2008 from 17.4% in 2007.
NPS’s operations recovered in the first six months of 2009 but performance remained below its historical levels. Forced outages improved to only 2.7% in the first half of 2009 from 5.2% in the entire 2008. In addition, operating margin before depreciation and amortization improved significantly to 29.8% in the first six months of 2009, up from 21.3% in 2008 as world coal prices tumbled. The operating margin for the first six months of 2009 included the loss from change in coal price index of Bt161 million for the 2003-2005 period, following the settlement of coal index reference with EGAT as per PPA amendment on April 2009. Net profit rose to Bt240 million in the first six months of 2009, compared with profits of only Bt33 million for the full year 2008.
TRIS Rating said that NPS’s operating margin will continue to be exposed to volatility of fuel costs with a lag adjustment of the Ft charge in the future. With the earnings before interest, tax, depreciation and amortization (EBITDA) of approximately Bt1,300-Bt2,000 million a year from the existing power plants and an investment plan of approximately Bt50,000 million during the next five years, leverage is expected to remain high, close to the current debt to capitalization ratio of 67.9% as of June 2009. NPS’s expansion plan includes a new power plant under the IPP scheme, four SPPs using renewable fuels, a private coal-fired cogeneration plant, and the acquisition of three of AA’s existing power plants. Once the expansion and acquisition plans are completed, the company’s generating capacity will increase to 1,503 MW, five times current capacity. All new SPPs are targeted to start operation from 2012 onwards, while the IPP project is expected to be completed in 2013-2014. There is a significant potential for growth once these projects commence, but the ability to develop all the projects without weakening the financial profile remains a rating concern, said TRIS Rating. -- End
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