GSPC's rating incorporates a two-notch uplift from its 'a-(tha)' Standalone Credit Profile (SCP) to reflect 'Moderate' linkages with its parent, PTT Public Company Limited (AAA(tha)/Stable). We expect GPSC to play a key role in PTT group's transition towards renewable energy and the development of its electronic-vehicle value chain.
GPSC's SCP reflects its strong business profile as a leading private power producer in Thailand. The company has around a 10% share of domestic power generation and increasing diversification from overseas assets. It also benefits from a portfolio of regulated power assets with predictable cash flow, as the majority of sales are under power purchase agreements (PPA) with strong counterparties. This is offset by high financial leverage from ongoing investments.
KEY RATING DRIVERS
Strengthened Linkage with PTT: Fitch believes linkages between GPSC and PTT have strengthened over the past few years. GPSC is the primary vehicle in PTT group's energy transition plan. GPSC's recent acquisition of solar and wind power plants in India and Taiwan, largely funded by a shareholder loan from PTT, is aligned with the group's strategy to boost its renewable portfolio to 12GW by 2030.
Some Price Risk: GPSC's earnings from electricity sales to industrial users, including PTT's affiliates, are exposed to some price risk. An adjustment mechanism exists to take into account fuel price changes, but the regulator aims to maintain stable tariffs in the country and there have been instances when higher fuel costs were not fully passed through in retail tariffs. The power utilities were allowed to recover their dues over time as and when fuel costs started declining.
We expect the higher 2H21 natural gas price to weaken GPSC's EBITDA margin to 26% in 2021, from 28% in 2020, as the retail tariff has not increased proportionately with fuel costs. However, the margin should recover to 28% in 2022, supported by our expectation of tariff adjustments, a lower gas price from new gas-production sharing contracts and higher efficiency after issues relating to unplanned shutdowns in 2021 are resolved.
Weaker Financial Profile: Fitch expects planned investments over the next three years to see GPSC's FFO net leverage rise to over 5.5x by 2023 (2020: 4.4x). These include the replacement of its Glow SPP natural gas plant and the acquisition of Thai Oil Public Company Limited's (TOP; A+(tha)/Negative) energy recovery unit project. GPSC's FFO leverage is likely to temporarily reach 7.5x in 2023 on account of the final project payment to TOP, but project revenue, together with cash flow from GPSC's Taiwanese investments, should support deleveraging to below 6.5x in 2024.
Enhanced Asset Diversification: We expect the contribution from GSPC's renewable energy sources to exceed 30% following the addition of 2.0GW from its new overseas solar and offshore wind assets in India and Taiwan, respectively. This will also boost its operating scale by more than 25% to 7GW by 2024, including a greater geographical reach. Nevertheless, the benefits will be offset by higher counterparty risk at its Indian assets and increased subordination in cash flow generation due to its minority shareholding in the overseas investments.
Revenue Visibility: GPSC has strong revenue visibility, as most of its assets are part of Thailand's regulated electricity business. The majority of its overseas investments, which are accounted for as associates, share similar features; long-term contracted sales and limited off-taker risk. Around 42% of revenue is contracted under long-term take-or-pay PPAs with state-owned Electricity Generating Authority of Thailand (BBB+/Stable), and a further 30% comes from PTT group. We expect GSPC to generate annual EBITDA of around THB17 billion-20 billion over the next three years.
DERIVATION SUMMARY
GSPC's National Long-Term Rating incorporates a two-notch uplift from its SCP, reflecting 'Moderate' linkages with PTT. GPSC is PTT group's flagship power business and is key for the group's expansion.
GPSC's business profile is strong compared with Thai national peers. Its earnings and cash flow profile is similar to that of Bangkok Aviation Fuel Services Public Company Limited (BAFS; BBB+(tha)/Stable), an aircraft fueling service operator at Thailand's major airport, and Navanakorn Electricity Generating Company Limited (NNEG; A-(tha)/Stable), a small power producer in Thailand. The companies have predictable and stable earnings due to low competition and, for GSPC and NNEG, the nature of their long-term contracts. GPSC has a stronger business profile than BAFS due to its greater asset diversification, revenue and earnings. BAFS has also been significantly impacted by the downturn in the aviation industry due to Covid-19 pandemic-related disruption, resulting in weak earnings and high financial leverage. This results in GPSC's SCP being one notch stronger than BAFS'.
We forecast much higher financial leverage at GPSC than for NNEG over medium term due to its high capex and investments. Hence, GPSC's SCP is the same as NNEG, despite its significantly better business profile stemming from better asset diversification and higher operating cash flow.
KEY ASSUMPTIONS
- Consolidated sales of THB67 billion-70 billion in 2021-2024 (2020: THB66 billion)
- Consolidated EBITDA margin of about 26%-28% in 2021-2024 (2020: 28%)
- Capex of THB63 billion and investment of THB35 billion over 2021-2024, including renewable investments in India and Taiwan.
- 40% dividend payout ratio
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
- Evidence of stronger ties with PTT
- An improvement in GPSC's SCP is unlikely in the medium term, considering our expectations of high financial leverage after recent acquisitions. We may consider a positive revision of the SCP if FFO net leverage falls to below 5.5x on a sustained basis
Factors that could, individually or collectively, lead to negative rating action/downgrade:
- Deleveraging that is slower than we expect due to higher investments or lower cash flow generation, resulting in FFO net leverage rising to above 6.5x for a sustained period.
- A weakening business profile due to aggressive investments in projects with high operating risks
- Weakened ties with PTT
- GPSC's senior unsecured rating could be notched down if prior-ranking debt/EBITDA increases to above 2.5x for a sustained period (2020: 2.0x)
LIQUIDITY AND DEBT STRUCTURE
Adequate Liquidity: GPSC's liquidity is supported by cash and cash equivalents of THB20.1 billion at end-June 2021. Debt maturing over 12 months from June 2021 amounts to THB19.0 billion and is mainly long-term debt. The company obtained an additional term-loan of THB20 billion in June 2021 from PTT to support its overseas investments.
ISSUER PROFILE
GPSC sells electricity, steam and industrial water to industrial customers, primarily PTT and its subsidiaries. It also sells electricity to Electricity Generating Authority of Thailand. GPSC's power assets are in Thailand and overseas, including India, Japan and Laos. Its total electricity and steam generating capacity has expanded after its 2019 Glow acquisition and from other investments, reaching 7GW and around 2,900 tonnes per hour, respectively.
SUMMARY OF FINANCIAL ADJUSTMENTS
Fitch adjusted GPSC's consolidated profile by proportionately consolidating IRPC Clean Power Company Limited based on GPSC's 51% stake in the power project. We believe GPSC does not have full access to the company's cash flow and has partial responsibility for its obligations based on the shareholding structure and funding arrangements.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Source: Fitch Ratings