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LJUBLJANA (Slovenia), September 9 (SeeNews) – Moody's Investors Service said it has upgraded the long-term corporate family rating (CFR) of Slovenian state-owned electricity producer Holding Slovenske Elektrarne (HSE) to Ba1 from Ba2 and the probability of default rating to Ba1-PD from Ba2-PD.
“Concurrently, Moody's has changed the outlook on HSE's ratings to stable from positive,” the rating agency said in a statement on Friday.
A CFR is an opinion on the HSE group's ability to honour its financial obligations and is assigned to HSE as if it had a single class of debt and a single consolidated legal structure, Moddy's noted.
Moody's also said:
RATIONALE FOR RATINGS UPGRADE
The rating upgrade reflects HSE's lower debt leverage, and Moody's expectation that the company will continue to benefit from robust electricity prices compared to the past few years, which together with a modest capital expenditure programme and an expected absence of dividends to shareholders, should enable further deleveraging over the next few years.
The higher electricity prices reflect the sharp rise in EU carbon prices in the second half of 2018 which were a key driver of higher profits in HSE's hydro generation division, and which is expected to continue. The price of EU Allowances has risen from below EUR8/tonne in January 2018 to above EUR24/tonne at the end of last year, supporting higher electricity prices.
The lower debt levels are evidenced by improved credit metrics for the financial year ending 2018 when HSE reported a lower leverage ratio of 5.5x Net debt/EBITDA compared to 5.7x in 2017. A combination of moderate capital expenditure focused mainly on maintenance, higher power prices and the absence of shareholder distributions enabled the company to reduce its reported financial debt by nearly 8% to EUR784 million per year end 2018.
HSE falls under Moody's rating methodology for Government-Related Issuers due to its 100% ownership by the government of Slovenia (Baa1 positive). The rating incorporates three notches of uplift from HSE's Baseline Credit Assessment (BCA) of b1, which has been upgraded from b2, reflecting the combination of (1) high default dependence (reflecting the company's strategic importance to the domestic economy); and (2) high likelihood of extraordinary support being provided by the Slovenian government in case of financial distress.
More generally HSE's rating reflects (1) HSE's position as the leading electricity generator in Slovenia; (2) the high share of profitable hydropower generation which benefits from rising power prices; (3) the company's focus on debt reduction as expressed by a target ratio of Net debt/EBITDA below 4.0x which should benefit from only selective capital expenditure over the next years, largely for maintenance; and (4) the shareholder's continued support in the form of restraint of dividend payouts. Moody's assumes that HSE's deleveraging efforts will be supported by elevated Slovenian power prices on the back of (1) growing electricity demand in the Balkans region; and (2) carbon allowance prices remaining at least on current levels of around EUR25/tonne.
However, HSE's rating is constrained by (1) the company's size and lack of diversification; (2) the inherent earnings volatility of the weather-dependent hydropower generation which is also the key source of cash flows; (3) the difficult operating environment for its thermal power generation, mitigated by the higher efficiency and lower carbon-intensity of the TES Sostanj plant following the decommissioning of its old unit 4, the refurbishment of unit 5 and the overhaul of the newest unit 6; and (4) the group's still high, though steadily reducing, leverage.
RATIONALE FOR THE STABLE OUTLOOK
The rating outlook is stable, reflecting Moody's expectation that credit metrics should further improve with Funds From Operations (FFO)/Debt ranging between 10% and 20% as a result of continued deleveraging and high power prices. The outlook also incorporates Moody's expectations of (1) a moderate capital expenditure programme over the 2019-21 period, focused mainly on maintenance; (2) Slovenian baseload power prices remaining on average above EUR 50/megawatt hour, which should filter into earnings; and (3) the continued absence of shareholder distributions. The outlook also incorporates Moody's assumption of a high likelihood of government support in case of financial distress of the company with Slovenia's sovereign credit quality remaining at least unchanged.
WHAT COULD CHANGE THE RATING UP/DOWN
HSE's BCA could be upgraded if the company's stand-alone credit profile continues to improve, as evidenced by an FFO/Debt ratio sustainably above 20%
The rating could be upgraded if HSE succeeds in materially reducing its outstanding financial debt further while maintaining good headroom against the financial covenants embedded in its bank loan agreements to deal with inherent earnings volatility. In addition, an upgrade would require no change from Moody's expectation of continued high support from the Slovenian government, which is incorporated into HSE's rating.
The rating could come under negative pressure, if (1) FFO/Debt were to fall sustainably below 10%; or (2) HSE was unable to meet its bank covenant tests, unless readily remediable and/or (3) there is a material deterioration in the credit quality of the government of Slovenia and/or a reduction in the support assumptions currently incorporated into Moody's assessment.
Headquartered in Ljubljana, Slovenia, HSE is the largest power generator in the country. Its total installed capacity as of the end of 2018 amounted to around 1,983 megawatts, which represented some 60% of the total installed generation capacity in Slovenia. HSE's generation base comprises various run-of-river hydro-power plants, one pump-storage plant, as well as lignite-fired and small gas-fired thermal power plants. In addition, HSE owns and operates a coal-mine, which covers all of the group's thermal generation needs. The company is 100% owned by the government of Slovenia and reported an EBITDA profit of EUR128 million on EUR 1,490 million of total revenues in the financial year 2018."