OREANDA-NEWS. Fitch Ratings (Thailand) Limited has downgraded Gulf Cogeneration Company Limited's (GCC) debentures maturing in April 2016 to 'A-(tha)' from 'AA-(tha)'. Simultaneously, the ratings have been removed from Rating Watch Negative (RWN). The Outlook is Stable.

The downgrade follows the withdrawal of Fitch's ratings on the guarantor of the bonds, DEPFA Bank (DEPFA), due to insufficient information to maintain the ratings. Although the guarantee on GCC's bonds still exists, Fitch can no longer rate the bonds based on the guarantee provided by DEPFA Bank. The 'A-(tha)' rating on the bonds reflects the standalone credit quality of GCC.

KEY RATING DRIVERS

Stable Cash Flow Profile: GCC has a stable and recurring revenue and cash flow profile. Around 85% of its revenue is contracted under a long-term take-or-pay power purchase agreement (PPA) with a strong customer, Electricity Generating Authority of Thailand (EGAT) - a government-owned utility. Fitch expects GCC to continue to generate stable funds flow from operations (FFO) of over THB350m a year over the next three years (2014: THB407m).

Limited Volume and Price Risks: Demand volatility and fuel price risks on electricity sales to EGAT are offset by the off-take and cost pass-through mechanisms under the PPA. The capacity charge under the PPA with EGAT insulates GCC from demand risk, while the cost pass-through provisions in tariff adjustment mitigates the risk from cost increases due to foreign exchange changes and inflation. Meanwhile, fuel cost is fully passed on to EGAT via energy charge payments under the PPA.

Some Fuel Cost Exposure: GCC's earnings on electricity sales to industrial users - around 15% of its revenues - could be impacted by the mismatch between the electricity selling price adjustments and changes in fuel costs, particularly during periods of fuel cost increases. The tariff structure for electricity sales to industrial users refers to the retail tariff charged by Provincial Electricity Authority of Thailand (the state's distribution company). Although there is an adjustment mechanism in place, the tariff adjustment is largely based on the discretion of the regulator.

Strong Operational Track Record: Operating risk is mitigated by the usage of commercially proven turbine and generator technology; and the effective and efficient operating and maintenance practices. The long-term gas supply agreement with PTT Public Company Limited (PTT, AAA(tha)/ Stable), the national oil and gas company, also ensures a stable and reliable supply of primary fuel for the power plant.

Single Asset Risk: The single-asset nature of GCC's power plant and its small size with no earnings diversification are the key constraints on its ratings. GCC's earnings and cash flow could be reduced by an unexpected outage and/or efficiency shortfall. Nonetheless, the long-term service agreement (LTSA) with General Electric should help mitigate the operational concern to some extent.

Deleveraging to Continue: GCC's financial leverage continues to improve as it pays down its debt. At end-2014, GCC's total debt decreased to THB896m from THB1,448m at end-2013, while its FFO-adjusted net leverage was 0.8x, improving from 2.7x at end-2013. The only debt at GCC is the rated bonds. In addition to GCC's own cash flows, the company expects to receive THB615m in 2015 and 2016 from two other power producers, which are wholly-owned by its parent, Gulf Electric Public Company Limited, because proceeds from the rated bonds were lent to them.

Rating Based on Standalone Profile: Fitch has assessed GCC's credit profile on a standalone basis, independent of its 100% owner, Gulf Electric Public Company Limited's credit profile. The covenants and cash management mechanisms attached to both the bonds and the DEPFA guarantee, ensure a strong degree of ring-fencing and protection for creditors at GCC.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for GCC include:
- Achieve target operational efficiency and receive full capacity payment in 2015 and 2016
- Power plant operating at 74% capacity factor in 2015 and 2016
- Capex of THB3.0m per annum in 2015 and 2016

RATING SENSITIVITIES

Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- Positive rating action is unlikely in the medium term as the rating is constrained by the small size and single asset risk.

Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Sustained performance shortfall of the power plant, resulting in a deterioration in funds flow from operations