Bangkok--14 Mar--Fitch Ratings
Fitch Ratings (Thailand) Limited has assigned Navanakorn Electricity Generating Company Limited (NNEG) a National Long-Term Rating of 'A-(tha)'. The Outlook is Stable. The rating reflects NNEG's strong cash flow visibility, moderate financial leverage and single operating asset risk.
KEY RATING DRIVERS
Firm Power Purchasing SPP: NNEG's rating reflects its strong and stable business profile as a small power producer (SPP) under Thailand's firm power purchasing programme for small producers. NNEG has a 25-year take-or-pay power purchasing agreement (PPA) under this programme to sell 90 MW of electricity to state utility Electricity Generating Authority of Thailand (EGAT). The company sells the remaining electricity and steam generation from its 125 MW gas-fired cogeneration power plant to industrial users under long-term sales contracts (20 years on average). These provide relatively stable recurring income and cash flow to the company.
Low Demand Risk: About 72% of NNEG's existing electricity generating capacity is sold under the PPA. Under the contract, EGAT has to pay a capacity charge and offtake at least 80% of contracted capacity. Although its electricity and steam sales contracts with industrial users do not have minimum offtake agreements, demand risk is mitigated by strong demand from industrial users in the Nava Nakorn Industrial Estate (NNIE) and its well-diversified customers. Manufactures in NNIE require more than 400 MW of electricity and 60 tonnes per hour of steam. NNEG is the only SPP in NNIE. In addition, one of its major shareholders, Nava Nakorn Public Company Limited, is the owner and operator of NNIE.
Some Price Risk: The PPA allocates market risk to EGAT, allowing NNEG to pass on any rise in fuel cost and foreign exchange risk to EGAT, while its steam sales to industrial users are on cost-plus pricing. However, NNEG's earnings from electricity sales to industrial users are exposed to some price risk. There is an adjustment mechanism in place that takes into account changes to fuel prices, but the tariff adjustment is largely based on the discretion of the regulator; there have been instances of slower-than-required tariff increases during periods of high fuel prices.
Near-Term High Leverage: Fitch expects NNEG's FFO-adjusted net leverage to rise to 5.0x-6.0x in 2019-2020 from 4.3x in 2017, as the company plans to invest up to THB3 billion for its 60 MW expansion plan over the next three years. NNEG's cash flow from operations will not be sufficient to cover the capex and dividend payment during the period. NNEG plans funding for the expansion to be equivalent to debt to equity ratio of 3:1. Nevertheless, its financial leverage will decrease meaningfully from 2021, as we do not expect any major capex. Higher cash flow from the expansion will also help the company to deleverage below 3.5x over the medium term.
Single Operating-Asset Risk: NNEG's single asset nature and its small size with no earning diversification are key constraints on its ratings. NNEG's earnings and cash flow could be significantly affected by the unanticipated outage or efficiency shortfall. Nonetheless, the operation and maintenance agreement with EGAT, the long-term service agreement with Siemens and the permanent flood protection system should help mitigate the operational concern.
DERIVATION SUMMARY
NNEG's rating reflects its strong cash flow visibility, single operating asset and moderate financial leverage. NNEG's business profile is strong relative to Thai national peers. However, its asset and business diversification are lower than those of power and utilities national peers, while its financial leverage is higher. NNEG has a more stable operating cash flow profile than WHA Utilities and Power Public Company Limited (WHAUP; BBB+(tha)/Negative, standalone credit profile of A-(tha)) backed by the PPA with EGAT, but less business diversification. Their financial leverage is comparable. Therefore, NNEG's rating is equal to WHAUP's standalone rating of A-(tha). WHAUP's 'BBB+(tha)' final rating with Negative Outlook is constrained by credit profile of its ultimate parent, WHA Corporation Public Company Limited.
NNEG has less asset diversification and much lower operating cash flow than Global Power Synergy Public Company Limited (GPSC; A+(tha)/Stable), while GPSC has low financial leverage. These lead to a lower rating for NNEG.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Our Rating Case for the Issuer
- Electricity and steam prices increase in line with gas price.
- Power generation for EGAT relatively stable, while demand from industrial users increases and stabilises in 2019.
- The expansion phase gradually ramps up from 2020 to its target utilisation in 2022.
- The expansion capex during 2018-2020 of THB3 billion.
- Dividend payout ratio of 80% to support shareholders' equity injection.
RATING SENSITIVITIES
Developments That May, Individually or Collectively, Lead to Positive Rating Action
Larger asset diversification and significantly higher operating cash flow, while maintaining forecast FFO-adjusted net leverage below 3.0x on a sustained basis.
Developments That May, Individually or Collectively, Lead to Negative Rating Action
Higher than expected investment, weaker-than-expected cash flow generation, weakening operating efficiency or ability to pass through costs and/or adverse regulatory development, with forecast FFO-adjusted net leverage above 4.0x on a sustained basis. However, Fitch expects leverage to remain above this threshold over 2018-2020 as a result of debt-funded brownfield expansion.
LIQUIDITY
Comfortable Liquidity: NNEG had outstanding debt at end-2017 of THB4.2 billion. THB279 million of debt is due to mature within 12 months. The liquidity is adequately supported by cash on hand of THB561 million, and NNEG's ability to generate stable funds flow from operations of around THB600 million-THB700 million a year in 2018-2020, except in 2019 when the company has a minor overhaul. NNEG also has available committed credit facilities for working capital of THB450 million from the project syndicated loan.