TEXT-Fitch affirms Slovenske Elektrarne A.S.
(The following statement was released by the rating agency)
July 2 - Fitch Ratings has affirmed Slovakia-based Slovenske elektrarne, a.s.' (SE) Long-term Issuer Default Rating (IDR) at 'BBB' with a Stable Outlook. Fitch has simultaneously affirmed SE's senior unsecured rating at 'BBB'. The affirmations reflect SE's strong asset base, profitability and cash flows, as well as progress on its 940MW Mochovce nuclear power plant's unit 3 and 4 construction despite the 10 month delay on the scheduled completion date (2013 and 2014). This has only a modest impact on expected credit metrics as the company continued to reinvest all free cash flow. Fitch estimates that the approximate EUR2bn capex planned for 2012-2014 will drive net lease adjusted debt to funds from operation (FFO) to a peak of around 3.8 times (x) at year-end 2013 (YE13), but for the leverage to decrease thereafter to below 3.0x. The leverage outlook, combined with SE's low cost of production, strong operational track record, and Slovakia's near-term electricity shortage, places SE at the current rating level. A further delay on the Mochovce project, significant cost overruns, a fall of electricity prices or a significant operational issue leading to a curtailment of production resulting in sustained leverage above 3.0x would lead to a downgrade. An upgrade is unlikely during the heavy capex period. SE's key risks include the construction, commissioning and financing of the new nuclear units, which will represent about 15% of SE's installed capacity. These risks are mitigated by SE's expertise with the pressurised water reactor design (SE commissioned its most recent unit in 2000), contractual terms with technology suppliers (capex is already largely contracted), existing construction approvals and financial support from shareholders through a zero-dividend policy until at least 2016. Fitch also notes that the Slovak government and public remain in favour of nuclear power despite the recent events in Japan. The EU-wide stress-test following the accident contributed to the delay. The composition of SE's generation fleet (43% hydro, 34% nuclear and 23% thermal), the increased operating efficiency of existing power plants, and workforce reduction suggest SE will remain a low-cost power producer. Fitch also notes that the negative impact from historically onerous contracts will cease from YE13. The economic recession affected power consumption and prices in Slovakia, but volume risk is low for SE because Slovakia is a net electricity importer. However, this will change after 2013 with the new capacity commissioning and SE's exposure to market risk may therefore increase. The agency believes that SE's growing portfolio of end-user contracts mitigates its volume risk. SE has already fully sold its capacity for 2012 and over 50% of 2013 capacity is also sold. Fitch expects SE's profitability to be supported by its low-cost and clean generation fleet despite possibly soft wholesale prices if the CO2 price remains low or is not fully reflected in electricity price and views its comparative operating risk as low for a competitive electricity producer. SE will require more than EUR1bn of external funding by 2014 to complete its capex plans. This is mitigated by the available liquidity of its 66% parent Enel SpA ('A-'/Rating Watch Negative), EUR20bn at YE11. Fitch would expect Enel to provide an intercompany loan to SE at arms length basis, if commercial loans are not available at better terms. At 31 March 2012, consolidated cash was EUR19m and unused facilities (maturing from 2012 to 2017) EUR770m. This compared with short-term debt of EUR23m and Fitch expected negative free cash flow for 2011 of around EUR700m. SE remains the largest electricity generator in Slovakia, with 75% (owned, leased and contracted) of the country's installed capacity. Enel has owned 66% of SE since April 2006. The remaining shares are owned by the Slovak government. Fitch continues to rate SE on a standalone basis due to relatively modest strength of its links with the parent. (Caryn Trokie, New York Ratings Unit)
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