(The following statement was released by the ratings agency)
Nov 19 - Fitch Ratings says in a report published today
that the central European (CE) electricity sector is entering a
capex-intensive period tied to the renewal of old generation
capacity and European Union (EU) regulations on carbon dioxide
(CO2) and renewables. The agency expects this period to last
until 2015-2020.
"The implementation of multi-billion-euro capex plans by
large central European utilities until at least 2013, including
investments in nuclear power, is likely to result in negative
free cash flow after dividends and the need to raise debt to
co-fund such spending in many cases." said Arkadiusz Wicik,
Director in Fitch's European Energy, Utilities and Regulation
team. "Fitch believes that large utilities in the region have
relatively good access to credit markets compared with smaller
projects or companies operating in cyclical sectors."
The increase in capex is related to the renewal of old
generation capacity, the need to adapt the generation fuel mix
to mitigate increasing exposure to CO2-emissions-related costs,
and the growing importance of renewables driven by EU
regulations. The agency believes that, despite the drop in
electricity demand in 2009 driven by the economic downturn in
the four countries covered in the report, long-term electricity
demand prospects in the CE remain favourable. (The four
countries are the Czech Republic, Hungary, Poland and
Slovakia.) Electricity demand should start to fundamentally
recover in 2011, enhanced by the broader economic recovery in
the region.
Fitch expects the three large CE electric utilities rated
by the agency - Czech Republic-based CEZ, a.s <>.
(CEZ; 'A-'/Stable), Poland-based PGE Polska Grupa Energetyczna
S.A <PGEPa.WA> (PGE; 'BBB+'/Stable) and Slovakia-based
Slovenske Elektrarne, a.s. (SE; 'BBB'/Stable) - to maintain
solid funds from operations (FFO) and EBITDA, and strong credit
ratios in 2009. The companies are expected to achieve this
despite weaker industry conditions, including reduced demand
and lower wholesale electricity prices. The forward hedging of
electricity sales for 2009, conducted in 2008 before prices
declined, is also likely to help the companies meet this
expectation.
Fitch believes that the impact of the economic downturn
will be more pronounced in 2010 results, but should not
materially erode the cash flows of the three rated entities.
All three players have low financial leverage (net debt to
EBITDA at end-September 2009 of 1.2x for CEZ, 0.5x for PGE and
0.2x for SE) which is projected by Fitch to grow to 2x-2.5x by
2012 due to large, partly debt-funded capex. Fitch's projected
deterioration of the credit ratios of the three utilities by
2012 is incorporated in their ratings and Outlooks.
Fitch expects bond issues to become a more important source
of funding for CE utilities, as bank loans are currently more
difficult and costly to raise than before the financial crisis
due to banks' decreased lending capacity. Fitch expects CEZ, as
the most frequent corporate bond issuer in CE, to continue to
tap the Eurobond market to co-fund its capex. Polish issuers
are also likely to come to the Eurobond market. PGE has
announced plans to issue its debut eurobond in H210, while
Tauron Polska Energia S.A. (Tauron) may issue bonds on either
the domestic or the international markets.
A visible trend in capex funding in the region is new
equity issuance by Polish state-owned power groups within their
IPOs. PGE conducted an IPO in early November 2009, the largest
IPO in Europe in 2009-to date, under which its new equity
issuance (a 15% stake) totalled almost PLN6bn (about EUR1.4bn).
This will mainly be spent on capex funding. In 2008,
Poland-based ENEA S.A. <ENAE.WA> raised about PLN2bn through an
IPO. Tauron plans to benefit from the equity market through a
planned IPO in Q210 to co-fund capex.
The report, entitled "Central European Electricity Sector -
Comparative Analysis of CEZ, a.s., PGE Polska Grupa
Energetyczna S.A. and Slovenske Elektrarne, a.s.", is available
on the agency's website at www.fitchratings.com.
