TRIS Rating Affirms Company Rating of “EASTW” at “A+” With “Stable” Outlook

TRIS Rating Co., Ltd. has affirmed the company rating of Eastern Water Resources Development and Management PLC (EASTW) at “A+” with “stable” outlook. The rating reflects EASTW’s strengths as the sole raw water provider with a comprehensive pipeline network in the Eastern Seaboard, high barriers to entry, and low operating risk. The rating is further supported by the reliable cash flow and strong financial profile. EASTW’s strengths are partially constrained by the large capital investment requirements, the unpredictable effects of climate change, customer concentration risk, and government regulations covering water resources management, which are not yet well-defined.

The “stable” outlook reflects the expectation that EASTW will sustain its cash flow generating capability and that business operations will not be adversely impacted by any shifts in government policy. EASTW is also expected to expand its business with a conservative leverage plan and well-disciplined monitoring.

TRIS Rating reported that EASTW was founded in 1992 and mandated as the sole raw water provider in seven provinces in the Eastern Seaboard, according to a Cabinet resolution to privatize the development and management of raw water distribution systems. Currently, the raw water provision services focus on Chonburi, Rayong, and Chachoengsao provinces following the development of industrial estates. In addition, the company also provides tap water in 10 service areas. In 2009, EASTW’s total revenue was Bt2,826 million. Raw water sales accounted for 66% of total revenue, while tap water services represented 22% of the total.

Since inception, the company’s business fundamentals have remained strong as raw water demand by industrial users on the Eastern Seaboard has grown consistently. Although, in 2009, the company posted a slight decrease in raw water demand of 1.4% year-on-year (y-o-y) due to the economic downturn, the increasing in the average tariff raised raw water revenue by 15% y-o-y to Bt1,904 million. The revenue generated from the tap water business remained strong, with sales rising by 13% in 2009. However, EASTW is exposed to customer concentration risk as Provincial Waterworks Authority (PWA) and Industrial Estate Authority of Thailand (IEAT), the major shareholders and key customers, contributed around 65%-70% of total sales during the last five years. Both PWA and IEAT have bargaining power when negotiating the purchase prices, especially the raw water tariff. The company has offered some discounts to these two state enterprises during 2008-2010.

TRIS Rating said, EASTW has leased and operated four water pipeline networks, previously overseen by the Ministry of Finance (MOF), since inception. Subsequently, EASTW continues developing its distribution network to be fully connected in all service areas. Although the operation does not require complicated technology, the extensive networks underscore the capital intensive nature of the business. EASTW is unlikely to face a threat from any large competitor in its raw water service coverage area for the foreseeable future. The fully connected network enhances its ability to efficiently manage and allocate water from various sources to its clients. However, climate change could affect the volume of rainfall, posing a major threat to the business profile. For the tap water business, demand grows steadily. However, the prospects for expansion depend on PWA’s policy to grant a new concession or subcontract its operations. Until now, the PWA’s policy does not have a clear direction.

EASTW’s solid financial performance is derived from reliable sources of income and resilient water demand. The operating margin before depreciation and amortization rose from 50.4% in fiscal year (FY) 2008 to 54.9% in 2009 and to 60.2% for the first three months of 2010. The improvement in profitability was due to a higher average water tariff and lower administration expenses. Operating cash flow has risen steadily to reach Bt1,085 million of funds from operations (FFO) in 2009. Total debt decreased significantly from a peak of Bt4,535 million in 2007 to 2,936 million in FY2008 and to Bt2,289 million in 2009 due to a very low level of capital expenditures required, especially for raw water business. As a result, cash flow protection, as measured by the ratio of FFO to total debt, improved from 31.4% in FY2008 to 47.4% in 2009. Leverage also improved, as shown by a drop in the ratio of total debt to capitalization from 32.9% in FY2008 to 26.5% in 2009. For the first three months of 2010, the FFO and total debt was Bt432 million and Bt2,793 million, respectively, which resulted in a FFO to total debt ratio of 15.5% (non-annualized) and a leverage ratio of 31.2%. Leverage is expected to rise as EASTW borrows to partly finance its investment plans. EASTW is laying a third pipeline from Nong Plalai to Map Ta Phut which will increase its capital expenditure to almost Bt3,000 million during 2010-2011, said TRIS Rating. -- End

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