Ratings agency Fitch said that it has upgraded the long-term foreign and local currency issuer default ratings (IDR) of state-owned Bulgarian Energy Holding (BEH) to BB+ from BB with a stable outlook.
Fitch also upgraded to BB+ BEH’s foreign-currency senior unsecured rating, including the rating of BEH’s 600 million euros bond due 2025 and the 600 million euros bond due 2028.
The positive ratings action follows the revision of BEH’s standalone credit profile (SCP) to bb from b+ in light of a solid financial performance and substantially reduced leverage as well as improvements in the regulatory framework, with the prospect of market liberalization. BEH’s SCP is being notched up once to the current rating as a result of strong links with its sole owner, the Bulgarian state (BBB/Positive).
Commensurate with the rise in energy prices, BEH reported a 92 % annual increase in standalone net profit to some 716 million euros for the first nine months of 2022, according to its most recent financial report.
The higher SCP also reflects an improved regulatory framework, which is relevant to a substantial part of BEH’s business mix as on average 19 % of EBITDA comes from regulated gas and electricity transmission. The SCP may further strengthen in the medium term, given the planned full liberalization of the energy market, albeit also subject to BEH’s financial policy and capex plan.
An increase in the average energy sale price due to a growing share of free-market transactions (around 80 % of generated volumes sold on unregulated market in 2022, compared to 75 % in 2021, 65 % in 2020) is the primary driver of our record EBITDA expectations for 2022.
The rating assumes EBITDA to peak in 2022 at around 2.2 billion euros before it trends lower to about 1.3 billion in 2025, which is still well above the long- term average, as markets normalize.
BEH’s merchant position allows for short-term profit maximization, but is a rating constraint as it exposes the group to price risk and introduces volatility and unpredictability to cash flow.
After the completion of the planned liberalization of the energy market in Bulgaria, Fitch expects that BEH will be able to sell its entire generated volumes in the competitive market, which should be beneficial for profitability given the favorable position of most of its generation assets, particularly nuclear and hydro power plants, in the country’s merit order. Bulgaria’s wholesale
electricity market is fully liberalized since June 2021, and the remaining retail part of the market should transition to market terms by 2025. The ongoing liberalization is seen as beneficial for BEH’s future financial profile, especially given recent day-ahead market coupling, which enables Bulgarian energy prices to follow EU electricity market price dynamics.
It is expected that the planned abolition of BEH’s subsidiary NEK’s public supplier function will improve the visibility of the group’s financial results and enhance the transparency of regulations.
The regulatory framework has already improved through establishing the Electricity System Security Fund, which successfully covered deficits arising from purchasing energy at regulated prices from producers and selling it to consumers at times of lower tariffs.
After withdrawing the public supplier function, NEK will become a purely hydro energy generator, which we deem positive for BEH’s credit profile.