ZAGREB (Croatia), May 6 (SeeNews) – Moody's Investors Service said it has upgraded the rating outlook on Croatia's state-owned power utility Hrvatska Elektroprivreda's (HEP) to positive from stable, and affirmed the company's Ba2 credit rating.
The change follows Moody's upgrade of Croatia's rating outlook to positive from stable made on April 26, the global rating agency said in an opinion report last week.
HEP's rating would normally incorporate an uplift from its standalone credit quality, given that it is 100% owned by the Croatian government as the company is of strategic importance for the country.
The credit rating reflects the likelihood of extraordinary support by the government in case of financial distress, Moody's noted.
"However, as the company derives most of its earnings from Croatia, it is exposed to domestic regulatory oversight and local economic conditions, its rating would not be expected to exceed that of the Government and so the company's current rating is aligned with the sovereign rating."
The Baseline Credit Assessment (BCA) of Ba2 is supported by (1) HEP's position as the vertically integrated incumbent in the Croatian electricity market and its leading market position, enjoying around 85% market share as supplier despite increasing competition; (2) its electricity generation mix, with a high share of low cost and low CO2 hydro and nuclear output; and (3) a strong contribution from lower risk regulated distribution and transmission activities amounting to over half of EBITDA, Moody's also said.
HEP's credit profile continues to reflect the company's lack of diversification in terms of market presence. Moreover, it takes account of a developing track record in regulation, although the framework is less transparent and predictable than Western European peers and certain smaller business segments, district heating and wholesale gas, reflect clearly suboptimal returns.
The company has historically demonstrated a variable dividend policy, and while somewhat unpredictable, its flexibility tends to reflect the supportive stance of the government. Dividends are likely to be more consistently paid in the future, given the company's strong credit metrics, Moody's added.
"The rating additionally reflects Moody's expectation that the company will continue to demonstrate a strong financial profile, building on its solid track record in recent years. The financial profile, as reflected in funds from operations (FFO)/net debt of 119% as of December 2017, is likely to weaken through a larger investment programme than in the recent past, which includes planned new generation capacity and investments to upgrade its ageing asset base and expand and extend its existing networks."
The rating nonetheless factors in that HEP remains exposed to fluctuating hydro levels and hence variable output from its hydro-dominated fleet, which normally generates at least half of its production. Generally the company purchases an additional 20-40% of energy on the market to meet the balance of its supply and trading needs. This creates some earnings volatility, as the company's exposure to imports and more expensive input costs of its own thermal fleet increases in dry years, Moody's also said.
A stronger credit profile of Croatia, as reflected in the change in outlook of the sovereign rating to positive from stable could result in a one notch uplift to HEP's BCA if the Government's rating is upgraded. The rating outlook also reflects Moody's expectation that HEP will continue to operate with a solid business and financial profile commensurate with the current BCA, it said.
"An upgrade in the rating of the Government of Croatia would likely result in an upgrade of HEP's rating, assuming no major deterioration in the company's business or financial profile in the meantime," Moody's said.
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