Fitch Affirms Thailand#s Navanakorn Electricity at #A-(tha)#; Outlook Stable

Stocks and Financial Services Press Releases Wednesday March 13, 2019 12:56
Bangkok--13 Mar--Fitch Ratings

Fitch Ratings (Thailand) has affirmed Navanakorn Electricity Generating Company Limited's (NNEG) National Long-Term Rating at 'A-( tha )'. The Outlook is Stable. The affirmation reflects our view that the company will reduce its FFO adjusted net leverage to below 4.0x in 2021 despite short-term pressure on the margins of electricity sales to industrial users and a capex revision.


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 to sell 90MW 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 (around 20 years on average). The earnings 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 with EGAT, which has to pay a capacity charge and offtake at least 80% of contracted capacity. NNEG's electricity and steam sales contracts with industrial users do not have minimum offtake agreements but the risk is mitigated by strong demand from industrial users in the Nava Nakorn Industrial Estate (NNIE) and its well-diversified customers. Manufacturers in the industrial zone, where NNEG is the only SPP, require more than 400MW of electricity and 60 tonnes per hour of steam. NNEG's shareholder, Nava Nakorn Public Company Limited, owns and operates NNIE.

Price Risk: The PPA allocates market risk to EGAT, allowing NNEG to pass on any rise in fuel cost and foreign-exchange risk to EGAT, while its steam sales to industrial users are on cost-plus pricing. However, NNEG's earnings from electricity sales to industrial users are exposed to some price risk. There is an adjustment mechanism in place that takes into account changes to fuel prices, but the tariff adjustment is based largely on the discretion of the regulator. NNEG's 2018 profit margin from sales of electricity to industrial users narrowed as the retail tariff was not increased to incorporate rising fuel costs.

Near-Term High Leverage: Fitch expects NNEG's FFO adjusted net leverage to rise to 5.0x-6.5x in 2019-2020 from 4.3x in the last 12 months ended September 2018 as the company plans to invest THB3.1 billion on its 60MW expansion plan over the next two years. However, NNEG issued THB6.4 billion in debentures in September 2018 to repay all of its bank loans and fund the expansion. Fitch expects its financial leverage to decrease meaningfully from 2021 as we do not expect any major capex. Higher cash flow after the expansion will also help the company to deleverage to below 3.5x over the medium term.

Single Operating-Asset Risk: NNEG's single asset nature and its small size with no earnings diversification are key constraints on its rating. NNEG's 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 at the power plant, and a permanent flood-protection system should help mitigate the operational risks.


NNEG's rating reflects its strong cash flow visibility, single operating asset and moderate financial leverage. NNEG's business profile is strong relative to Thai national peers. However, its asset and business diversification are lower than those of power and utility national peers, while its financial leverage is higher. NNEG has less asset diversification and much lower operating cash flow than Global Power Synergy Public Company Limited (GPSC; A+(tha)/Rating Watch Negative). In addition, GPSC's financial leverage, excluding a recently announced acquisition, is lower. These lead to lower rating for NNEG. GPSC has been placed on Rating Watch Negative, pending greater clarity on its long-term funding and capital structure after the acquisition.

JWD InfoLogistics Public Company Limited (JWD; BBB+(tha)/Negative), a leading full-service inland logistics provider in Thailand, and NNEG are both small companies. NNEG has a much more stable operating cash flow profile backed by resilient demand, the firm PPA with EGAT and no competition, while JWD has some earnings visibility from its sole concession for transporting dangerous goods at Laem Chabang Port and long-term contracts with several customers. Both have large investment plans over the next two years, resulting in higher financial leverage. NNEG's stronger business profile justifies its higher rating, although JWD's financial leverage is likely to remain lower than that of NNEG.

Fitch's key assumptions within our rating case for the issuer include:
  • Power generation for EGAT to stay relatively stable, while demand from industrial users increases and stabilises in 2019.
  • EBITDA margin to decline in 2019 due to a minor overhaul of the power plant and weakener margin of electricity sales to industrial users.
  • The expansion to gradually ramp up from 2020 to its target utilisation in 2022.
  • Expansion capex during 2018-2020 of THB3.1 billion.
  • Dividend payout ratio of 80% to support shareholders' equity injection to help fund capacity expansion.
Developments That May, Individually or Collectively, Lead to Positive Rating Action
  • Larger asset diversification and significantly higher operating cash flow, while maintaining forecast FFO adjusted net leverage below 3.0x on a sustained basis.
Developments That May, Individually or Collectively, Lead to Negative Rating Action
  • Forecast FFO adjusted net leverage above 4.0x on a sustained basis. However, Fitch expects leverage to remain above this threshold over 2018-2020 as a result of debt-funded brownfield expansion.
  • Adverse regulatory development or failure to pass through costs, resulting in a sustained deterioration in the EBITDA margin.

Comfortable Liquidity: At end-September 2018, NNEG had outstanding debt of THB6.4 billion, of which THB324 million is due to mature within 12 months. Liquidity is adequately supported by cash on hand of THB2.7 billion, and NNEG's ability to generate stable funds flow from operations of around THB500 million-THB800 million a year in 2019-2020. These should be enough to support its investments in 2019-2020.

Additional information is available on

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