May 19 (SeeNews) - Moody's Investors Service said on Friday it has affirmed the Baa2 long-term issuer ratings of Croatian state-owned electricity company Hrvatska Elektroprivreda (HEP) and downgraded to baa3 from baa2 the Baseline Credit Assessment (BCA), as outlook remains stable.
“Today's rating action reflects Moody's view that HEP's lower BCA, arising from the company's exposure to adverse regulatory developments, is offset by a high probability of support from the company's shareholder, the government of Croatia (Baa2 stable),” Moody's said in a press release.
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The downgrade of the BCA reflects Moody's view that HEP's risk profile has increased as a result of adverse regulatory and political developments driven by social considerations.
On March 14, the Croatian government announced a fourth package of measures to protect households and the economy from high energy prices, which included the extension of a cap on end-consumer electricity prices until September 30.
“This is credit negative for HEP because the company has a structurally short generation position. It therefore needs to procure on the wholesale market at a higher price the electricity volumes in excess of its own power generation that are required to supply its customer base. More importantly, the extension of the price cap also evidences the government's use of HEP as an instrument to deliver social policies, which include tackling energy affordability,” Moody's said.
The pressure on profitability stemming from the price cap is exacerbated by the earnings volatility experienced by HEP resulting from its fluctuating hydropower production. The company ended the first half of 2022 with an operating loss of around 151 million euro ($163 million), driven by significantly lower hydropower production. In addition, HEP's district heating business remains exposed to high gas procurement costs because tariffs are currently frozen.
Moody's also said that nonetheless it anticipates a strengthening of leverage metrics over the next two to three years as a result of higher achieved power prices for HEPs' electricity production starting from October 2023 when the price cap is scheduled to end, reflecting favorable hedging positions at high prices.
The stable outlook reflects Moody's view that, subject to the price cap termination, HEP's financial metrics will recover in 2024, and that the company will remain supported, if needed, by the Croatian government.
($ = 0.926 euro)
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