Fitch Rates Navanakorn Electricity#s Thai Baht Debentures #A-(tha)#

Stocks and Financial Services Press Releases Wednesday July 18, 2018 17:11
Bangkok--18 Jul--Fitch Ratings

Fitch Ratings (Thailand) has assigned Navanakorn Electricity Generating Company Limited's (NNEG, A-(tha)/Stable) upcoming senior unsecured amortising debentures of up to THB6.4 billion a National Long-Term Rating of 'A-(tha)'. Proceeds will be used to refinance bank loans and support NNEG's expansion plans.

The debentures are rated at the same level as NNEG's National Long-Term Rating based on Fitch's expectation that the company will use the proceeds to repay all its bank project loans and release all its security pledges. The debenture terms and conditions include a negative pledge clause. All of NNEG's debt will be senior unsecured after the debenture issuance.

KEY RATING DRIVERS

Firm Power-Purchasing SPP: NNEG's rating reflects its strong and stable business profile as a small power producer (SPP) under Thailand's firm power-purchasing programme for small producers. NNEG has a 25-year take-or-pay power purchasing agreement (PPA) under this programme, which allows it to sell 90 megawatts (MW) of electricity to state utility, Electricity Generating Authority of Thailand (EGAT). The company sells the remaining electricity and steam generation from its 125MW gas-fired cogeneration power plant to industrial users under long-term sales contracts, which average at 20 years and provide relatively stable recurring income and cash flow to the company.

Low Demand Risk: About 72% of NNEG's electricity generating capacity is sold under the PPA, under which EGAT pays a capacity charge and offtakes at least 80% of contracted capacity. NNEG's electricity and steam sales contracts with industrial users do not have minimum offtake agreements, but demand risk is mitigated by strong demand from the Nava Nakorn industrial zone, where NNEG is the only SPP, and well-diversified customers. Manufacturers in the zone require more than 400MW of electricity and 60 tonnes per hour of steam. NNEG's shareholder, Nava Nakorn Public Company Limited, owns and operates the zone.

Some Price Risk: The PPA allocates market risk to EGAT, allowing NNEG to pass on any rise in fuel costs and foreign-exchange risk, while its steam sales to industrial users are cost-plus pricing. However, earnings from electricity sales to industrial users are exposed to some price risk. There is an adjustment mechanism that takes into account changes to fuel prices, but the tariff adjustment is largely based on regulatory discretion; there have been instances of slower-than-required tariff increases during periods of high fuel prices.

Near-Term High Leverage: Fitch expects NNEG's FFO adjusted net leverage to rise to 5.0x-6.0x in 2019-2020, from 4.3x in 2017, as the company plans to invest up to THB3 billion for its 60MW expansion plan over the next three years. Cash flow from operation will be insufficient to cover capex and dividend payments during the period. NNEG plans funding for the expansion to be equivalent to a debt/equity ratio of 3.0:1. Nevertheless, its financial leverage will decrease meaningfully from 2021, as we do not expect any major capex. Higher cash flow from the expansion will also help the company deleverage to below 3.5x over the medium term.

Single Operating-Asset Risk: NNEG's single-asset nature and small size with no earning diversification constrains its rating. Earnings and cash flow could be significantly affected by an unanticipated outage or efficiency shortfall. Nonetheless, the operation and maintenance agreement with EGAT, a long-term contract for Siemens AG (A/Stable) to provide maintenance for key components of its power plant and a permanent flood-protection system should help mitigate operational risks.

DERIVATION SUMMARY

NNEG's rating reflects its strong cash flow visibility, single operating asset and moderate financial leverage. Its business profile is strong relative to Thai national peers. However, its asset and business diversification is lower than that of power and utilities national peers, while its financial leverage is higher. NNEG has less asset diversification, lower operating cash flow and higher financial leverage than Global Power Synergy Public Company Limited (A+(tha)/Rating Watch Negative), leading to a lower rating for NNEG.

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
  • Electricity and steam prices increase in line with gas price.
  • Stable power generation for EGAT, with higher demand from industrial users that stabilises in 2019.
  • Expansion phase gradually ramps up from 2020 to its target utilisation in 2022.
  • Expansion capex during 2018-2020 of THB3 billion.
  • Dividend payout ratio of 80% to support shareholders' equity injection to help fund capacity expansion.
  • Issuance of THB6.4 billion in bonds in 2018.
RATING SENSITIVITIES
Developments that May, Individually or Collectively, Lead to Positive Rating Action
  • Greater asset diversification and significantly higher operating cash flow, while maintaining forecast FFO adjusted net leverage below 3.0x for a sustained period.
Developments that May, Individually or Collectively, Lead to Negative Rating Action
  • Higher-than-Fitch-expected investment, weaker-than-Fitch-expected cash flow generation, weakening operating efficiency or ability to pass through costs or adverse regulatory developments, with forecast FFO adjusted net leverage above 4.0x for a sustained period. However, Fitch expects leverage to remain above this threshold over 2018-2020 due to the debt-funded brownfield expansion.
LIQUIDITY

Comfortable Liquidity: NNEG had outstanding debt of THB4.2 billion at end-March 2018, with THB279 million of debt maturing within 12 months. Liquidity is adequately supported by cash on hand of THB586 million and NNEG's ability to generate stable fund flow from operation of around THB600 million-700 million a year in 2018-2020, except in 2019 when the company plans a minor overhaul. NNEG also has available committed working capital credit facilities of THB450 million from the syndicated loan for the power plant.


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