Fitch Ratings has revised JSC ENERGO-PRO Georgia’s (EPG) Outlook to Negative while affirming the utilities company’s Long-Term Issuer Default Rating (IDR) at ‘BB’. A full list of ratings actions is available at the end of this commentary.
The revision of Outlook mirrors a similar rating action on EPG’s sole shareholder, ENERGO-PRO a.s. (EPas). EPG’s ratings are aligned with those of EPas, reflecting strong ties between the two, including direct funding from the parent. EPG is one of the key operating subsidiaries within the group, and was responsible for about one third of EPas’s EBITDA in 2017.
The ratings also reflect the standalone profile of EPG, its natural monopoly position in electricity distribution and supply, with regulated asset-based tariffs set by the independent regulator in Georgia, the short track record of regulation, EPG’s small size compared with other rated CIS utilities’, volatile EBITDA and FX exposure.
Ratings Aligned with Parent’s
EPG is a part of an ultimately privately-owned utilities group EPas, which also owns electricity companies in Bulgaria and Turkey. We assess the relationship between EPG and EPas as strong, as the latter provides all funding, following the refinancing of the subsidiary’s external debt with a shareholders loan in 2018 and EPG’s significant contribution to EPas’s EBITDA (around one third in 2017). Historically, EPG also provided loans to its shareholder, interest on which was capitalised rather than paid. EPG set off the amount refinanced by EPas with the respective amount of issued loans to the parent following the refinancing in 2018. There is management commonality and no significant ring-fence around EPG.
Large Georgian Distribution Company
EPG is one of the largest electricity distribution companies, with a market share of about 44% of country consumption and 62% of consumption via distribution companies. It distributes electricity to all regions of Georgia except the capital city of Tbilisi. EPG’s credit profile is supported by the company’s natural monopoly position in electricity distribution and supply, with regulated asset-based tariffs set by the independent regulator in Georgia.
The regulatory framework for the electricity distribution business in Georgia has been based on the regulated asset-based (RAB) principle since 2015. This is a key component for determining capex, although it is based on assets’ book values rather than replacement values. The company has entered the second three-year regulatory period in 2018 that envisioned the upward revision of weighted average cost of capital to 16.4% from 13.54% to stimulate further investment in the sector. Volume and price risks are mitigated by a correction mechanism provided by the regulatory framework. The company applies for a supply tariff revision within the tariff year if there are significant fluctuations in electricity prices. This was the case in 2015 following local currency devaluation, which had a direct impact on electricity prices.