Tris upgrades Gulf ratings, maintains stable outlook
Tris Rating has upgraded the company rating for Gulf Energy Development Plc to A+ from A, also moving the rating on Gulf’s senior unsecured debentures to A from A-.
The rating outlook remains stable. The rating upgrades reflect a substantial rise in Gulf’s cash flow, following the start of the commercial operation of its independent power producer (IPP) projects.
The increasing cash generation will help reduce leverage pressure.
The issue ratings’ single notch below the company rating reflects the structural subordination of the senior unsecured debentures to the debt obligations of Gulf’s operating subsidiaries.
The ratings continue to reflect Gulf’s position as one of the leading power producers in Thailand, its well-diversified portfolio, its proven record of developing and operating power plants, and its highly predictable cash flows, backed by long-term power purchase agreements (PPAs) with the Electricity Generating Authority of Thailand (Egat, rated “AAA/stable”).
However, the ratings are constrained by risks associated with the company’s overseas investments and its rapid expansion.
Tris expects Gulf’s cash flow to stay on a growth path over the next three years.
The company’s two IPP projects, with an aggregate equity power capacity (or installed capacity in proportion to its ownership in the power plants) of about 3,700 megawatts, will significantly bolster its cash flow.
Half of the capacity has begun generating power with favourable results. Tris believes the remaining capacity will commence operation during 2023-24 as scheduled.
The agency’s base-case projection assumes Gulf’s total equity power capacity in the operational phase will reach 8,700MW in three years, from 4,966MW as of December 2022.
The additional operating capacity will likely boost the company’s total operating revenue to 115 billion baht in 2025, from about 100 billion in 2022.
Earnings before interest, taxes, depreciation and amortisation (Ebitda) should rise to 41 billion baht in 2025, from about 30 billion in 2022.
Its Ebitda margin (Ebitda as a percentage of revenue) should stay above 30% over the forecast period.
Gulf sold only about 10% of its electricity to industrial customers, helping limit the adverse impact from the volatile prices of natural gas.
Tris forecast Gulf to receive an annual dividend of 4-6 billion baht from Intouch Holdings during 2023-25, with a special dividend of about 2 billion in 2023. The considerable amount will help stabilise Gulf’s cash flow.
Tris believed Gulf’s financial leverage has already passed the peak level.
Despite the continued rapid expansion, the company’s rising cash flow should lower its debt to Ebitda ratio to about 7 times over the next three years, from almost 10 times in 2021.
Its base-case projection assumes Gulf’s capital expenditure and equity investment to range from 20-40 billion baht per year during 2023-25.
Tris expect Gulf to rein in its financial leverage. The company recently reduced its ownership in an offshore wind power plant in Germany to 25% from 50%.
The divestment proceeds of €305 million, or about 11 billion baht, helped Gulf manage its debt load meaningfully, particularly during rapid expansion.
The partial divestment has also allowed Gulf to deconsolidate the debt of the power project worth €541 million, or about 20 billion baht.
Gulf’s large number of investments creates financial flexibility as it can divest parts of its investments to reduce gearing, if needed.
As of September 2022, Gulf’s consolidated debt was 263 billion baht. Of this, 159 billion baht was considered priority debt, comprising secured debt owed by Gulf and all borrowings incurred by its operating subsidiaries.
The priority debt to total debt ratio was 60%, suggesting that Gulf’s unsecured creditors are significantly disadvantaged to the priority debt holders with respect to claims against the company’s assets.
As of December 2022, Gulf had an aggregate equity power capacity of 8,622MW.
According to the project schedules, all power projects under construction and development will be completed by 2027.
A rating upgrade could happen if Gulf’s financial profile significantly improves.
Conversely, a rating downside could occur if the projects under development are materially delayed from schedules, significantly affecting projected cash flow.
Any large debt-funded investment, which materially deteriorates the company’s capital structure, could also put downward pressure on the ratings.
A debt to Ebitda ratio significantly above 8 times on a sustained basis could pressure the ratings.