(The following statement was released by the rating agency)
Oct 12 - Fitch Ratings has upgraded Energa S.A.'s Long-term foreign and local currency Issuer Default Ratings (IDRs) to 'BBB' from 'BBB-' and National Long-term rating to 'A(pol)' from 'A-(pol)'. The Outlooks are Stable. Fitch has also assigned Energa foreign and local currency senior unsecured ratings of 'BBB' and a National senior unsecured rating of 'A(pol)'.
Fitch has also assigned a local currency senior unsecured rating of 'BBB' and a National senior unsecured rating of 'A(pol)' to Energa's PLN4bn domestic Bond Issue Programme and an expected local currency senior unsecured rating of 'BBB(EXP)' and an expected National senior unsecured rating of 'A(pol)(EXP)' to an upcoming bond issue planned to be launched within this programme.
The upgrade of Energa's ratings is driven by its improved financial flexibility driven the by recent changes in its long-term capex plan, increased focus on the distribution segment and slower than previously expected increase in projected leverage by 2015.
In September 2012 Energa announced changes in its long-term capex plan with slightly reduced planned capex for the period 2012-2016 to PLN14bn, down from PLN16bn for 2011-2015. Furthermore, Energa has frozen the project to construct the large hard-coal power plant in Ostroleka with the estimated cost exceeding PLN6bn. A large portion of the capex previously allocated to the Ostroleka plant was reallocated to the distribution segment and for renewables, which positively influenced the financial profile and capex flexibility. As a result, instead of a large coal-fired generation project, Energa will realise multiple smaller, scalable investment projects that could be subject of postponements or adjustments in case of weaker than expected cash flow generation. Capex spend in distribution is quickly remunerated via tariff increases as the investments are agreed with the regulator.
Energa's credit profile was strengthened by a continued increase in the contribution of regulated earnings to EBITDA (58% in 2011 and 70% in H112) driven by the asset revaluation process and successful implementation of capex in networks. The proportion is expected to remain well above 60% in the mid-term contributing to cash flow stabilisation.
Fitch views the legal framework for Polish distribution networks as supportive and relatively stable. However, it has several weaknesses when compared with regulatory frameworks in western European countries. These include the lack of a multi-year tariff setting mechanism, return on the regulatory asset base (RAB) not fully reflecting the fair value of assets, volume risk existing in the framework and large capex needs resulting in negative free cash flow. The agency believes that these shortcomings do not warrant a one-notch senior unsecured uplift over the Long-term IDR for Energa despite the fact that the proportion of regulated cash flow is above 50% of EBITDA.
Energa's cash balance of PLN1.6bn, compared with gross debt of PLN2.2bn at end-June 2012, indicates low net leverage. However, Fitch expects the company's credit metrics to deteriorate due to new debt that Energa plans to raise in 2012-2016 to finance its large capex plans. Fitch forecasts the group's funds from operations (FFO) adjusted net leverage ratio to increase from almost zero at end-2011 to around 3x by end-2016, which is close to the maximum leverage allowed for the current rating. Fitch views positively that management revised its maximum net leverage to 2.5x net debt to EBITDA from 3.0x. The revised investment programme leading to more capex flexibility (capex for a single project does not exceed an annual EBITDA) should help the company maintain its leverage target.
Energa's progress in arranging the external debt (PLN385m of new banking loans arranged in 2012 and new PLN4bn domestic bond programme) mitigated the funding risk. The company benefits from the financing mix totalling PLN3.5bn established in 2009-2012, with limited maturities due by end-2016.
Energa's ratings continue to reflect its partially vertically-integrated operations, although its scale is smaller than that of its Polish peers and Energa lacks a mining segment and has weaker generation assets. The company has a strong market position in the distribution (16.1% in 2011) and supply segments (14.9%), but its market share in the generation segment amounts to only 2.9%. Energa is exposed to wholesale electricity price risk as the group sells much more electricity (18.6 TWh in 2011) than it generates (4.7 TWh). This could be seen as beneficial in the low prices environment but it exposes Energa to price risk, which is mitigated by the company's trading and hedging policy.
Fitch assesses Energa's liquidity as strong. At end-June 2012, Energa had PLN1.6bn of unrestricted cash and cash equivalents against short-term debt of PLN188m. The group also had unused committed facilities of PLN0.9bn at end-June 2012.
WHAT COULD TRIGGER A RATING ACTION?
Positive: Future developments that may, individually or collectively, lead to a positive rating action include:
- After the upgrade to 'BBB' the upside potential for Energa's ratings is limited. A longer track record of transparent regulations, including several years of a gradually rising return on the regulatory asset base (RAB) and introduction of a multi-year tariff setting mechanism could lead to a one notch rating uplift of the senior unsecured ratings above the Long-term IDRs.
Negative: Future developments that may, individually or collectively lead to negative action include:
- Failure to contain FFO-adjusted net leverage below 3x on a sustained basis would result in downward rating pressure.
For all of Fitch's Eurozone Crisis commentary go to