(The following statement was released by the rating agency)
Dec 13 -
Summary analysis -- Ratchaburi Electricity Generating Holding Publi 13-Dec-2012
CREDIT RATING: BBB+/Stable/-- Country: Thailand
Credit Rating History:
Local currency Foreign currency
06-Jan-2011 BBB+/-- BBB+/--
19-Nov-2010 BBB/-- BBB/--
The corporate credit rating on Thailand-based Ratchaburi Electricity Generating Holding Public Co. Ltd. (RATCH) reflects the company’s solid and long-term power purchase agreements (PPAs) with Electricity Generating Authority of Thailand (EGAT; BBB+/Stable/--; axA+/axA-1), its good market position, and “modest” financial risk profile. EGAT’s weaker stand-alone credit profile (SACP) at ‘bbb’ and RATCH’s limited fuel and site diversity in its portfolio of power plants temper the above strengths. RATCH’s increasing exposure to new international markets is also a rating weakness. EGAT owns 45% of RATCH, with the balance held by private parties.
We assess RATCH‘S business risk profile as “satisfactory.” In our opinion, RATCH has a good market position despite facing some concentration risk. The company is the second-largest electricity generator in Thailand and is the country’s largest independent power producer. Besides being a single-site asset at Ratchaburi, about 80% of the capacity is gas-fired. About 90% of RATCH’s revenue and net income currently come from its Thailand operations. RATCH’s reliance on dividend contribution from Ratchaburi Electricity Generating Co., Ltd. decreased to 85% of total dividend income from 100%.
RATCH benefits from a stable operating and financial performance because its PPAs with EGAT ensure steady capacity payments for agreed levels of availability and heat rate. The agreements protect RATCH from any demand side risk, and RATCH has maintained high plant availability. They also allow the company to pass on most costs, especially fuel cost, and earn a fixed return on equity.
We believe RATCH also benefits from EGAT’s considerable experience of running power plants because EGAT provides operating and maintenance services to RATCH. RATCH is likely to benefit from a stable demand for power in the near to medium term. The demand for power in the first half of 2012 was more than 5% higher than in the same period in 2011, and it has grown steadily over the past decade. The continuing economic recovery in Thailand after the floods in the fourth quarter of 2011 supports power demand from EGAT and, consequently, RATCH.
RATCH’s ambition to expand offshore, the pace of such expansion, and the credit quality of assets acquired or investments made would likely influence the company’s credit profile over the next few years. In 2011, RATCH acquired generation assets in Australia, with revenues secured by PPAs. It is also seeking to invest in Laos and Cambodia, mainly through joint ventures with strategic partners. While the strategy may help RATCH diversify its portfolio, it is also likely to expose RATCH to different competitive factors in different jurisdictional and regulatory environments.
We do not expect Australia’s new carbon legislation to have any impact on RATCH’s business there. RATCH terminated the PPA for the Collinsville power plant (180 MW), receiving compensation of A$99.57 million. RATCH expects to receive carbon credits over the next few years on the plant. The company also sold its stake in its coal-fired power plant, LoyYang A, to AGL Energy Ltd. (BBB/Stable/--) in June 2012. RATCH-Australia Corp. Ltd.’s (RAC) current capacity is 719.5 MW.
We estimate RATCH’s ratio of funds from operations (FFO) to debt to remain at 25%-29% over the next 18 months. RATCH’s ratio of adjusted debt to capital increased to about 41% in 2011, from about 27% in 2010, because the company used debt to purchase of additional shares in RAC. Australian utility companies, such as generation assets in RAC, tend to have higher leverage than RATCH. Australian companies also pay higher interest rates than Thai companies, thus affecting RATCH’s interest coverage ratios. Nevertheless, the Australian utilities tend to have higher operating margins than RATCH.
We do not consider RATCH to be a government-related entity despite EGAT being RATCH’s largest shareholder with a 45% stake. EGAT also controls the company’s board of directors. EGAT buys all of RATCH’s power and operates many of its power plants. As a result, the rating on RATCH is no more than one notch above the SACP of EGAT.
We assess RATCH’s liquidity to be “strong,” as defined in our criteria. The company’s sources of liquidity are likely to exceed its uses by more than 1.5x over the next 12 months. Our liquidity assessment is based on the following factors and assumptions:
-- We expect the company’s liquidity sources to be about Thai baht (THB) 25 billion over the next 12 months including cash and cash equivalents and funds from operations.
-- We expect RATCH to have steady recurring cash flows, with FFO averaging more than THB11 billion per year over the next two to three years.
-- Liquidity uses include about THB11 billion in the next 12 months for capital spending, debt maturities, working capital needs, and dividends.
RATCH has supportive banking relationships and good access to domestic and international debt markets. The company’s recent issuance of JPY15 billion in senior unsecured bonds due 2026 highlights this strength.
The stable outlook reflects our expectation that RATCH’s operating performance and cash flows from existing power operations will remain stable in the next 12-24 months. The outlook also reflects our view that the company will face no major challenges in integrating its Australia business.
We may lower the rating on RATCH if the company’s financial performance deteriorates due to debt-funded acquisitions or investments that are higher than our expectation, leading to an FFO-to-debt ratio of less than 20% or a net-debt-to-EBITDA ratio materially higher than 2.5x on a sustainable basis. We may also lower the rating if we lower the SACP of EGAT or if RATCH continues to invest significantly in joint ventures and associated projects in higher-risk jurisdictions, such that the performance of these entities becomes the key rating driver.
We believe the potential for an upgrade is limited over the next two years. However, we may raise the rating on RATCH if: (1) we upgrade EGAT; or (2) RATCH’s business risk profile improves significantly through acquisition of good-quality assets, while the company maintains a modest financial risk profile.
Related Criteria And Research
-- Business Risk/Financial Risk Matrix Expanded, May 27, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008