Fitch Ratings has assigned Hungary’s largest electricity and gas utility MVM first-time foreign and local currency long-term Issuer Default Ratings (IDR) of BBB with a stable outlook.
The ratings reflect MVM’s high market share and an integrated position across the various segments of the Hungarian electricity and gas markets. They also reflect a solid share of regulated and quasi-regulated business in MVM’s EBITDA, which contributes to cash-flow predictability. The ratings also incorporate MVM’s smaller size of operations and lower financial transparency than some regional peers’.
We expect the company’s funds from operations (FFO) net leverage to increase to about 3.3x in 2022-2023 due to large CAPEX and acquisitions, reducing rating headroom, but still supporting a stable outlook.
MVM’s long-term IDRs are at the company’s Standalone Credit Profile (SCP) of bbb. The company benefits from tangible support from its sole owner, the Hungarian state (BBB/stable), but the linkage currently has no impact on MVM’s IDRs, as the rating of Hungary and the SCP of MVM are at the same level.
The business profile of MVM benefits from its strong market position in Hungary, spanning electricity generation (62 % market share), gas imports (off-taker in the main gas imports contract), gas storage (65 % market share), electricity transmission (100 % market share), electricity and gas distribution (12 % and 48 %, respectively), as well as electricity and gas wholesale and retail supply as the main company in the market.
As a result, MVM has better integration and business diversification in electricity and gas than most of its central European peers.
MVM’s business profile also benefits from an estimated 45% average share of regulated and quasi-regulated EBITDA over 2020-2023. The regulated component contains electricity transmission and electricity and gas distribution, while the quasi-regulated contribution comes primarily from gas storage and renewable generation. Regulatory framework for networks in Hungary is based on a regulatory asset base (RAB) concept and matches the EU’s standards. The framework benefits from full insulation from volume risk through a two-year correction mechanism.
MVM has lower exposure to rising CO2 costs and is better positioned in the energy transition than most of its central European peers rated by Fitch. This is attributed to the low carbon footprint of the company’s 3.8 GW generation fleet, which is based on nuclear generation (53 % of 2020 generation capacity), natural gas and other (19 %) and renewables (5 %), complemented by coal, biomass and waste (23 %).
The carbon footprint will decrease further upon the planned phase-out of coal by 2025 by replacing its Matra coal-fired power plant with combined cycle gas turbine (CCGT) capacity, which will be positive for MVM’s business profile.
MVM’s strategy provides for expansion in central Europe, so that by 2025 25 % of EBITDA should be generated abroad. The international expansion would improve geographical diversification, but also leads to execution and profit-dilution risks. In late 2020, MVM acquired Innogy Czech Republic, a leading Czech supplier of natural gas and electricity, which was its first large international acquisition.
