Bangkok--29 Dec--TRIS Rating
TRIS Rating Co., Ltd. has affirmed the company and issue ratings of Eastern Water Resources Development and Management PLC (EASTW) at “A+” with “stable” outlook. The ratings reflect EASTW’s strengths as the sole raw-water provider with a comprehensive pipeline network in the Eastern Seaboard area, favorable growth prospect in the waterworks business, and the company’s strong financial profile. The ratings are further supported by the high barriers to entry, EASTW’s predictable and stable cash inflow streams, and its low operational risk. EASTW’s strengths are partially constrained by the large capital requirements and the effects of unpredictable climate change, and government regulations on water resources management that are not yet well defined.
The “stable” outlook reflects the expectations that EASTW will continue to sustain its cash flow generation capability and its business operations will not be adversely impacted by any shifts in government policies.
TRIS Rating reported that EASTW was founded in 1992 and has been the sole raw water operator in seven promoted provinces in the Eastern Seaboard area after a Cabinet resolution to privatize the tasks of developing and managing raw water distribution systems. The company leases and operates four water pipeline networks, previously overseen by the Ministry of Finance (MOF), serving Chonburi, Rayong, and Chachoengsao provinces. In addition, EASTW, through its subsidiaries and joint-ventures, is engaged in other water-related businesses, namely, waterworks services, drinking water, and pipe-making. Raw water accounts for about 60% of EASTW’s total revenues, with waterworks services taking 30%; while contributions from drinking water and pipe businesses are marginal.
For the fiscal year ended September 2006, raw water sales of EASTW grew by 5% from a year earlier, lower than the 5-year average growth rate of 12%. The slower growth is mainly due to frequent rainfall in 2006 causing more clients to use water from their own storages. Nonetheless, the company’s business fundamental remains strong as raw water demand of industrial users in the Eastern Seaboard is highly stable. EASTW should have no direct competitor in its raw water services for the foreseeable future given its extensive networks and the capital intensiveness of the business. The abundance of water in 2006 stands in sharp contrast to the drought crisis a year earlier. The storage levels of most reservoirs in the Eastern Seaboard have almost reached the maximum capacities. With two new pipeline routes (Bangpakong-Bangpra and Prasae-Klongyai), EASTW’s ability to efficiently manage and allocate water from various sources to servicing destinations is expected to improve. For the tap water services, the completions of projects in Rayong and Sattahip, together with the likelihoods of new waterworks projects up for bids will support the company to sustain its growth momentum.
TRIS Rating said, well-protected business with reliable and predictable sources of income has been the main pillar supporting EASTW’s solid financial performance. As of year end 2005/2006, cash flow protection as measured by the ratio of funds from operations to total debt stood at 16.2%, considering sufficient for company whose cash flows are predictable. Operating margin before depreciation and amortization was 44.8%, down from 51.0% a year earlier. The ratio of total debt to capitalization also weakened considerably from 41.2% in 2004/2005 to 50.6% in 2005/2006, as mounting debt burdens to finance extensive capital programs have pressured its credit profile. EASTW anticipates its capital spending over the next few years to fall to roughly Bt1 billion per annum, down from Bt3.4 billion in 2005/2006, as most medium-term infrastructure projects had been completed. EASTW’s leverage is anticipated to deteriorate from current level, but its debt service ability should remain strong.
As of year end 2005/2006, EASTW’s net debt to earnings before interest, tax, depreciation, and amortization (EBITDA) at 4.6 times marginally exceeded the covenant limits at 4.5 times in certain borrowing contracts. EASTW is in the process of discussion with bondholders and a lender to resolve the issue. Although the current debt is not expected to impair EASTW’s financial profile, TRIS Rating will monitor the situation closely.
Eastern Water Resources Development and Management PLC (EASTW)
Company Rating: Affirmed at A+
Issue Ratings:
EAST087A: Bt1,300 million senior debentures due 2008 Affirmed at A+
EAST117A: Bt1,200 million senior debentures due 2011 Affirmed at A+
Rating Outlook: Stable