Bangkok--30 Jun--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 derived from the mix of biomass fuel used, and an experienced management team from the Double A Alliance Group (AA Group). The rating takes into consideration the power plant’s operating risk, high fuel prices, and weakening financial position following the debt-funding acquisition and over 100% dividend payout. NPS’s aggressive expansion plan will lead to draw on more resources and capital requirements in the near future. The “stable” outlook reflects TRIS Rating’s expectation that NPS will continue to receive stable revenue from the existing power plant with no major threats to fuel supply. NPS’s increasing risk appetite and aggressive expansion plans will pressure its financial profile over the near to medium term. Substantial equity injection will be needed to maintain appropriate gearing level. TRIS Rating reported that NPS was set up to operate two mixed-fuel power generators with a total capacity of 327 megawatts (MW) under the SPP scheme. The power plant is located in 304 Industrial Park which belongs to the AA Group. The power plant uses coal and biomass, i.e. rice husk and wood bark, for fuel. NPS is considered to be a part of the AA Group due to the close business relationship. NPS’s key management, which have operated biomass power plants since 1987, are appointed by the AA Group. Other members of the AA Group serve as NPS’s maintenance service provider, biomass supplier, and major customers. TRIS Rating said, NPS’s electricity revenue is 100% secured under two 25-year Power Purchase Agreements (PPAs) with the Electricity Generating Authority of Thailand (EGAT) for 180 MW and a 15-year Power Sales Agreement with 304 Industrial Park Co., Ltd. (304IP) for 50-120 MW. The entirety of its steam output is supplied to Advance Agro PLC (AA) under a 25-year contract. In 2007, sales to EGAT contributed 37% of revenue while sales to 304IP and AA accounted for 50% and 13%, respectively. Coal, which is the main fuel, costs approximately 50%-60% of total cost of goods sold. NPS sources its coal partly 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 mix of fuels, NPS manages to generate a higher operating margin than 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. NPS has experienced high forced outages, especially during the last two years. The fuel price risk substantially increased as coal prices have risen steeply since the second half of 2007 to over US$100/tonne in early 2008. The supply of biomass fuel is somewhat limited and is also demanded by other industries, the prices has gradually increased and remained at high levels. In 2007, NPS’s sales dropped 6.8% from the previous year, due to plants being shut down for long periods for both major overhauls and forced outages. Net profit was seriously impacted from the high fuel prices and declined to Bt936 million compared with Bt1,694 of the previous year. Operating margin before depreciation and amortization, though remained strong, dropped to 38.1% in 2007, compared with over 40% in the past. In 2007, NPS borrowed Bt4,977 million from Biomass Electricity Co., Ltd. (BECO) to finance Bt2,100 million acquisition of Thai Power Generating Co., Ltd. (TPG) and to pay Bt2,500 million in dividends to its parent company. Total debt to capitalization jumped from 46.6% in 2006 to 66.1% in 2007 while funds from operations (FFO) to total debt deteriorated from 45.2% to 17.8% during the same period. NPS’s leverage is expected to remain high during the next five years since the company has a Bt53,100 million expansion plan and an obligation to buy back BECO’s preferred shares for Bt7,316 million. NPS’s expansion plan includes a new power plant under Independent Power Producer (IPP) scheme, four SPPs using renewable fuels, a private coal-fired cogeneration plant, and the acquisition of three AA’s existing power plants. Once completed, the company’s generating capacity will increase more than triple of current level, adding 1,185 MW to NPS’s portfolio. All new SPPs target to start operation from 2011 onward, while IPP is expected to be completed in 2013. The company’s business has a potential growth once those projects commence, but NPS’s ability to develop all the projects simultaneously remains to be seen, said TRIS Rating. National Power Supply Co., Ltd. (NPS) Company Rating: Affirmed at BBB+ Rating Outlook: Stable