Bangkok--15 Feb--TRIS Rating
TRIS Rating Co., Ltd. has affirmed the company rating of National Power Supply Co., Ltd. (NPS) at “BBB+” with “stable”outlook. The rating reflects NPS’s stable cash flow from long-term sales contracts under the Small Power Producer (SPP) scheme, high profitability, operating flexibility derived from the mix of biomass fuel used, and experienced management team from the Double A Alliance Group (AA Group), which has operated the biomass power plants since 1987. The rating takes into consideration the power plant’s operating risk, high fuel prices, and the availability of biomass fuel. The acquisition of a new subsidiary at a very high price raises concerns over inter-group transactions and the company’s investment discipline.
The “stable” outlook reflects TRIS Rating’s expectation that NPS will continue to receive stable revenue from the long-term offtake contracts with all customers, including the Electricity Generating Authority of Thailand (EGAT). The power plant is expected to be well managed by the AA Group, with no major threats to the fuel supply situation.
TRIS Rating reported that NPS was set up under the SPP scheme to operate two mixed-fuel power generators with a total capacity of 328 megawatts (MW). The power plant is located in 304 Industrial Park which belongs to the AA Group. The AA Group is one of Thailand’s largest conglomerates, engaged in a variety of businesses including rice milling, agribusiness, pulp and paper, trading, real estate, and power generation. The power plant uses coal and biomass, i.e. rice husk and wood bark, for fuel. Despite no direct shareholding, NPS is considered to be a power plant of the AA Group due to the close business relationship. AA Group executives serve as key managements for NPS, and members of the AA Group are NPS’s power plant operator, maintenance service provider, biomass supplier, and major customers.
The electricity revenue of NPS is 100% secured under two 25-year Power Purchase Agreements with EGAT (180 MW) and a 15-year Power Sales Agreement with 304 Industrial Park Co., Ltd. (304IP) (50-120 MW). All of the steam output is supplied to Advance Agro PLC (AA) under a 15-year Steam Supply Agreement. Sales to EGAT contributed 42.8% of revenue for the first nine months of 2006, while sales to 304IP and AA accounted for 44.5% and 12.7%, respectively. On the supply side, coal, the main fuel which accounts for 90% of total fuel cost, is sourced largely from Marubeni Corporation under a 15-year Coal Supply Agreement, while all biomass fuel is supplied by the AA Group under long-term contracts. Using a mixed fuel, NPS manages to generate a high operating margin, compared with operators using conventional fuel, due to the relatively low cost of biomass. While this provides the advantage of flexibility in fuel selection, the biomass co-fired power plant is exposed to greater operating risk, due to the specific characteristics of each biomass type. As a result, NPS has experienced high forced outages, especially in the last two years. Moreover, since the supply of rice husk is somewhat limited and can be used in other industries, the rising demand has kept prices at high levels.
In 2005, NPS’s sales increased by 6.5% from the previous year, largely due to price increases. As a result, net profit increased by 4.1% to Bt1,653 million. Funds from operations have remained high at over Bt2,000 million for two consecutive years. In January 2006, NPS acquired Biomass Electricity Co., Ltd. (BECO) at cost of Bt1,000 million, which was 5 times the book value of BECO. The transaction has not proven to be economical. Any uneconomical transaction could impair the company’s credit quality and potentially lead to a rating downgrade, said TRIS Rating.