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Rating Action:

Moody's upgrades Holding Slovenske Elektrarne's rating to Ba1 from Ba2; changes outlook to stable

06 Sep 2019

Frankfurt am Main, September 06, 2019 -- Moody's Investors Service ("Moody's") today has upgraded the long-term corporate family rating (CFR) of Holding Slovenske Elektrarne d.o.o. ("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.

A CFR is an opinion of 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.

RATINGS RATIONALE

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 EU1,490 million of total revenues in the financial year 2018.

The methodologies used in these ratings were Unregulated Utilities and Unregulated Power Companies published in May 2017, and Government-Related Issuers published in June 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Mark Remshardt
Vice President - Senior Analyst
Infrastructure Finance Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Andrew Blease
Associate Managing Director
Infrastructure Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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