(The following statement was released by the rating agency)
Nov 08 - Fitch Ratings believes that the credit profiles of Polish utilities benefit from a continued increase in regulated earnings and their rising share in EBITDA. Growing regulated earnings in the distribution segment result in lower exposure of the groups' cash flow to power and fuel prices and greater predictability of cash flow. Importantly, the relative growth of the network segment comes chiefly from increased regulatory remuneration and asset base and only partially from weakness in supply and generation segments.
Increased focus on the distribution segment and the rising contribution of regulated earnings to EBITDA (46% in 2010, 58% in 2011 and 70% in H112) were among the key drivers of the recent upgrade of Energa S.A.'s Long-term foreign and local currency Issuer Default Ratings (IDRs) to 'BBB' from 'BBB-'.
Fitch expects that because of the rising return on the regulatory asset base, successful implementation of network capex and weak performance of the generation segments the share of regulated earnings in total EBITDA will remain well above 60% in the mid-term for Energa S.A. and stay at about 50% for Tauron Polska Energia S.A. ('BBB'/Stable) and ENEA S.A. ('BBB'/Stable). PGE Polska Grupa Energetyczna S.A.'s ('BBB+'/Stable) ratio will remain below 30%, mainly due to a strong generation segment.
One of the factors supporting the continued growth of tariffs and EBITDA of the distribution segment of the Polish utilities has been the asset revaluation process agreed with the energy regulatory office and applied since 2009. The regulator gradually increases the return on the regulatory asset base of assets put into operation before 2009 with the aim of finalising the process around 2015 when the old assets will likely be fully remunerated based on their regulated asset value. An increase in regulated EBITDA has also been driven by large capital expenditure in the distribution network, which is fully remunerated via tariff increases in the following years.
A rising proportion of the regulated EBITDA in Polish utilities' earnings is also caused by the weakness of the conventional generation segment on the back of the weak power pricing environment, finalisation of compensation payments for the termination of historical power purchase agreements (PPAs) and the gradual auctioning of CO2 allowances from 2013.
Fitch views the regulatory framework for Polish distribution networks as supportive and relatively stable. Although relatively new, the framework is gaining predictability because of the timely approval of the tariffs by the regulator on an annual basis. The agency believes the framework is supportive for capex as new assets are fully remunerated in the tariff.
However, the tariff framework is not mature and has several weaknesses compared with regulatory frameworks in western European countries. These include the lack of a multi-year tariff setting mechanism, return on the regulatory asset base not fully reflecting the fair value of assets, and volume risk existing in the framework. The agency believes that these shortcomings, and a relatively low number of transactions demonstrating achievable market valuation of networks in Poland currently prevent a one-notch senior unsecured uplift from the Long-term IDR for Polish utilities, despite the fact that the proportion of regulated cash flow is over 50% of EBITDA for some of the companies. Fitch expects the key parameters of the regulatory framework to change little until at least 2015. The regulator has announced that from 2016, qualitative elements are likely to be introduced into the tariff-setting mechanism, which might influence the operators' earnings in the long term.
Although the capex requirements in the Polish distribution segment are huge and the investments are quasi-committed due to the agreed long-term development plan with the regulator, there is some capex flexibility as the projects are modular and smaller than in new large scale generation capacities and could be subject to certain adjustments in case of weaker cash flow generation. Fitch also notes that network investments are easier to fund as lenders are more inclined to provide relatively attractive funding for infrastructure assets, especially compared with funding of many of the generation projects, which are also burdened with higher construction risk.
In FY11, Tauron confirmed its leading position in the Polish distribution segment with almost 53 TWh of energy dispatched (37%) by the acquisition of the distribution assets from Vattenfall AB ('A-'/Stable) in December 2011. It is followed by PGE with over 31 TWh (or 25.5%), Energa and Enea, which are substantially smaller with 19.6 TWh and 17.1TWh energy dispatched or 16% and 14%, respectively.