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Fitch Assigns ENERGO-PRO a.s. Notes Final 'BB'.

Moscow/London: Fitch Ratings has assigned ENERGO-PRO a.s.'s (EPas) EUR250 million 4.5% notes due in 2024 a final senior unsecured 'BB' rating, in line with its Long-Term Issuer Default Rating (IDR) of 'BB', which has a Stable Outlook.

The notes are issued by EPas and constitute its direct, unconditional, unsubordinated and unsecured obligations, and rank equally among themselves and with all other unsecured and unsubordinated obligations. The notes are fully and unconditionally guaranteed by ENERGO-PRO Georgia Generation JSC, ENERGO-PRO Georgia JSC, Energo-Pro Varna EAD and Turkish subsidiary Resadiye Hamzali Elektrik Uretim Tic. A.S. (RH Turkey). The guarantors together represented around 93% of consolidated EBITDA in 2016. The proceeds will be used by EPas for the refinancing of group indebtedness, mainly at the level of its operating companies.

EPas's 'BB' IDR reflects the supportive network regulatory regime and support mechanism available for part of the generation business, as well as the company's geographic diversification. The ratings also factor in EPas's small size relative to other rated European utilities, cash-flow volatility due to supply pass-through items, regulatory changes, and varying hydrology conditions affecting generation volumes. Operating environment and key-person risk stemming from ultimate ownership by one individual are also limiting factors. The ratings further reflect EPas's consolidated group profile, without notching for subordination based on the group refinancing plan.


Centralised Group Funding: After repayment of the operating companies' debt from the Eurobond proceeds, EPas will complete the transition to a centralised group funding model. The company will also extend debt maturities, which improves near-term liquidity, but adds to refinancing needs later on. In addition, RH Turkey has become an additional guarantor for the new notes and for the ones (EUR370 million) issued in December 2017.

However, the lack of debt amortisation may lower the pace of deleveraging if the company directs a significant share of freed-up cash to dividends. We slightly increased our forecasts for annual dividend payments from 2019 from EUR15 million to about EUR22 million, a level which will allow the company to remain within its proposed restricted payment and debt incurrence net debt/EBITDA covenant of 4.5x on/or before 7 December 2019, 4x after 7 December 2019 and on/or before 7 December 2020, and 3.5x after 7 December 2020, as well as an internal target of 3.5x from 2019. EPas expects its dividend policy to remain flexible and subject to business needs.

Removal of External Guarantees: EPas intends to remove the guarantee for one of its sister companies' debt within its parent, DK Holding group, and is negotiating the terms with the lender. The company expects to complete the process by mid-2018.

This should improve leverage metrics as we include guarantees in the adjusted debt calculations. We forecast funds from operations (FFO) connection-fee and guarantees adjusted net leverage to decrease to 4.7x in 2018 (6.2x in 2017E) and to average about 4.2x over 2019-2021, which is adequate for the ratings. However, if the guarantee does not disappear within months, our negative guideline on leverage will be breached. This may lead to negative rating action.

Diversified Group, Small Size: EPas is an independent hydro power producer and electricity distributor in the Black Sea region, operating 35 power plants in Bulgaria (BBB/Stable), Georgia (BB-/Positive) and Turkey (BB+/Stable), with a total installed capacity of 854MW (87% of which is from hydro power plants), up to 3TWh of power generation per annum and about 11TWh of electricity distributed in Bulgaria and Georgia. EPas is small compared with most rated European utilities, although the company benefits from geographical diversification with the Georgian and Bulgarian businesses each contributing about 41% of EBITDA, and with the remainder generated in Turkey.

EBITDA Volatility: EPas's EBITDA has been volatile over the last four years, ranging from EUR104 million in 2014 to EUR164 million in 2016 on the back of variable hydrology conditions and tariff changes. We expect EBITDA to decline in 2017, due to lower hydro generation in all three countries and temporary volume-related volatility in the distribution business. However, we expect EBITDA to recover to the 2013-2016 average in 2018.

Positive Free Cash Flow: We expect EPas to continue generating healthy cash flow from operations on average of about EUR99 million over 2017-2021. The company expects to increase capex to an average of around EUR55 million over 2017-2021, from an average of around EUR33 million over 2013-2016. The investment programme is aimed at network upgrades in Georgia and medium- and low-voltage grid upgrades in Bulgaria. We forecast the company will remain intrinsically (pre-dividend) free cash flow (FCF) positive.

FX Exposure: The company is exposed to FX fluctuations as almost all of its debt at end-2017 was denominated in currencies other than those in which the company generates revenue. The majority of debt was in Eurobonds (61%) and from the Czech Export Bank (29%), mainly to fund the investment programme. In contrast, all its revenue is denominated in local operating currencies, although tariffs in Turkey are determined in US dollars and the Bulgarian leva is pegged to the euro. EPas does not use any hedging instruments, other than holding some cash in foreign currencies. We do not expect major changes to FX exposure following the refinancing.

Part of Larger Privately Owned Group: EPas is part of larger DK Holding Investments s.r.o. (DK Holding) which is ultimately owned by one individual. Therefore, we assess key-person risk from a dominant shareholder as higher than for most rated peers. DK Holding also includes two hydro plants in the Czech Republic, hydro development and construction projects in Turkey and a hydro equipment production business in Slovenia. The latter two require capex, which may be funded through dividends received from EPas, as it is the major cash-generating subsidiary within DK Holding.


EPas is smaller than other rated European utilities such as EP Energy, a.s. (BB+/Stable), Energa S.A. (BBB/Stable) or Bulgarian Energy Holding EAD (BB/Stable), although it is one of the largest utilities in Georgia (for example compared with Georgian Water and Power LLC (BB-/Stable)) and Bulgaria. The company's EBITDA was more volatile over 2013-2016 than many peers', but it benefits from mostly neutral to positive FCF generation. EPas's leverage is higher than EP Energy's and Energa's.


Fitch's Key Assumptions Within Our Rating Case for the Issuer

- Bulgarian, Georgian and Turkish GDP growth of 2.7%-5% over 2018-2021

- Bulgarian, Georgian and Turkey CPI of 1.7%-10.6% over 2018-2021

- Electricity generation to decline by about 19% yoy in 2017 before rising to the average over 2013-2017 (cumulatively over all regions in which EPas operates) from 2018

- Capex close to management expectations of about EUR55 million on average over 2017-2021

- Dividend payments will be zero in 2018 and about EUR22 million over 2019-2021

- GEL2.61 per 1USD in 2018 and GEL2.64 per 1 USD on average over 2019-2021

- USD1.2 per EUR1 in 2018 and USD1.22 per EUR1 on average over 2019-2021

- Refinancing at EPas level and removal of upstream guarantees from EPas


Developments that May, Individually or Collectively, Lead to Positive Rating Action

-Increased scale of operations, less volatile earnings, strong track record of supportive regulation and reduction of FX exposure

-Improved FFO adjusted net leverage (excluding connection fees and including group guarantees) below 3.5x on a consistent basis

Developments that May, Individually or Collectively, Lead to Negative Rating Action

- Failure to remove the guarantees from EPas, a reduction in profitability and cash generation, leading to an increase in FFO adjusted net leverage (excluding connection fees and including group guarantees) above 4.5x and FFO fixed charge coverage below 4x on a consistent basis


Adequate Liquidity: Fitch views EPas's liquidity as manageable. At end-2017, EPas's short-term debt was EUR83 million against available cash and cash equivalents of EUR36 million, unused credit facilities of EUR1.8 million and expected positive FCF in 2018 of EUR53 million. The company will refinance the operating companies' debt with the Eurobond proceeds, which will extend debt maturities and improve near-term liquidity. We expect EPas to remain FCF positive in 2019-2021.
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Publication:Daily the Pak Banker (Lahore, Pakistan)
Date:Jul 27, 2018
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