S&P Global Ratings said it has revised the outlook of Bulgarian National Electricity Company (NEK) to stable from negative and affirmed the state- owned company’s long-term issuer credit rating at B+
The statement from the agency said that the outlook revision reflects its view that the credit quality of NEK’s parent, state-owned Bulgarian Energy Holding (BEH), has stabilized. NEK’s rating will continue to be driven by the support of its parent which will maintain adequate liquidity and funds from operations (FFO) to debt in the 12 – 20 % range.
S&P views NEK as a strategically important subsidiary of BEH, given the former’s very important role in Bulgaria’s energy system as a hydropower producer and supplier of last resort. Despite improving operating performance, NEK has historically accumulated a lot of debt. It therefore has a significantly higher leverage than BEH. In 2021-2022, S&P expects NEK’s FFO to debt to stay below 12 %, versus its estimate of 12 – 20 % for BEH. NEK’s rating therefore includes uplift for parent support and is capped one notch below bb- assessment of the group credit profile.
Nevertheless, NEK’s stand-alone credit quality is strengthening. NEK’s EBITDA is expected to remain resilient and free operating cash flow (FOCF) to be positive, because the company benefits from ongoing electricity sector liberalization and favorable electricity prices, and its ongoing tariff deficit is covered from Security of Electricity Supply Fund (SESF). Indeed, the company generated EBITDA of 127.5 million euros in the first half of 2021, compared to 121 million and 97.5 million euros for the full years 2020 and 2019, respectively. NEK’s 2020 FOCF was also positive, at 64.5 million euros, thanks to only minimal CAPEX and mostly non-cash interest on related party debt. As a hydropower producer, NEK is well positioned in the energy transition sector and may be eligible for EU grants for green CAPEX, if and when Bulgaria’s energy strategy and NEK’s specific projects are finalized and obtain all necessary approvals.
The outlook is stable. This reflects expectation that the rating on NEK will continue to depend on BEH’s credit quality due to the one-notch differential between the rating and S&P’s assessment of NEK’s b SACP, but also the expectation that BEH’s credit metrics will gradually strengthen. After the low 12 % FFO to debt in 2020, the ratio will be firmly between 12 and 20 % in 2021-2022. S&P also expects BEH to have sustainable liquidity after the 600 million euros bond issue in July 2021.
