Bangkok--29 Mar--Fitch Ratings
Fitch Ratings today said in a special report that the credit outlook for the Thai power sector is generally stable for 2007. This is based on steady demand growth supported by relatively low electricity consumption per capita, limited competition as the market is dominated by state power utilities, and Fitch’s expectations of a stable regulatory environment. However, the agency noted that a highly-regulated tariff mechanism obstructs the financial performance of the industry.
“Although the tariff formula is set to reflect operating and investment costs of operators being passed through to consumers, tariff adjustments are still highly regulated by the government,” said Lertchai Kochareonrattanakul, Director in Fitch’s Asia-Pacific Energy and Utilities team. “The lack of an effective adjustment amid sustained high fuel prices has adversely affected the financial performance of the Thai electricity industry, especially the Electricity Generating Authority of Thailand (EGAT),” added Mr. Kochareonrattanakul.
The report also notes that state-owned utilities, which still dominate the sector, benefit from strong implicit support due to their strategic importance in the Thai power industry. The government will continue to be involved in setting the companies’ strategic direction as well as approval of investment plans. Meanwhile, the utilities also obtain financial support from the government when issuing bonds, in the form of government guarantees.
A study of the four major power producers shows declining operating margins for state-owned operator, EGAT, because EGAT was instructed to absorb rising fuel costs in 2005. However, Fitch expects that its profitability is likely to recover in 2006 as tariffs were increased during the year to reflect the actual rise in fuel costs. By contrast, private power producers continued to report strong cash flows in 2005 and 2006, as a result of the favourable terms and conditions of their long-term power purchase agreements with EGAT.
“Capex plans will be more aggressive during the next five years and largely debt-funded,” stated Mr. Kochareonrattanakul. “Consequently, the credit metrics and financial flexibility of the four major power producers is expected to decline following positive free cash flow positions and generally lower debt balances over the past three years.” According to the Power Development Plan 2004, EGAT plans to invest around THB330 billion (USD9.2bn) in new capacity and to augment the transmission system during 2007-2011, or around THB66bn per year. The figure is much higher than its spending in FY05 of THB16bn.
On the regulatory side, the report notes that the electricity sector reform plan has returned to a framework with limited private sector participation (only on the supply side) from a long-term plan that was previously moving towards a competitive power pool with competition being introduced at both wholesale and retail levels. Although the sector reform could be revised by the government, Fitch does not expect any major changes in the medium term due to increasing public resistance to privatisation of public power utilities.
A copy of the report “Thailand Power Sector: Stable Credit Outlook, But Still Highly Regulated” will be available shortly on the agency's websites, www.fitchratings.com and the subscription-based www.fitchresearch.com .
Contacts: Lertchai Kochareonrattanakul, Obboon Thirachit, Vincent Milton; Bangkok, Tel: +662 655 4755, Carolyn Martin; Brisbane, Tel: +617 3222 8611
Note to Editors: Fitch’s National ratings provide a relative measure of creditworthiness for rated entities in countries with sub- or low-investment grade international sovereign ratings. The best risk within a country is rated ‘AAA’ and other credits are rated only relative to this risk. National ratings are designed for use mainly by local investors in local markets and are signified by the addition of an identifier for the country concerned, such as ‘AAA(tha)’ for National ratings in Thailand. Specific letter grades are not therefore internationally comparable.
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