Fitch: Potential Investments Credit-Negative for Energa and ENEA
The newly contemplated investment projects include the joint construction by Energa and ENEA of a new 1GW hard coal power block in Ostroleka for PLN5.5bn-PLN6bn (EUR1.3bn-EUR1.4bn) and acquisition of Polish assets of Electricite de France S. A. (EdF, A-/Stable) by a consortium of Energa, ENEA, PGE Polska Grupa Energetyczna S. A. (PGE; BBB+/Stable) and PGNiG Termika S. A. EdF's assets comprise a 1.8GW coal power plant as well as several CHP plants and heating grids across Poland. In addition, ENEA is considering investment in state-owned coal mining company Katowicki Holding Weglowy S. A. (KHW) of up to PLN350m.
For Energa and ENEA both the construction of the new block in Ostroleka and acquisition of EdF assets are large-scale projects that would impact their business profile by lowering the share of the more predictable regulated electricity distribution business in their EBITDA. Both companies, based on their existing capex plans, have limited rating headroom for any large - scale on-balance sheet new investments.
In addition, Fitch believes that it will be challenging for the investment in Ostroleka to achieve a reasonable return, especially after the commissioning of the Lit-Pol Link 500 MW power interconnector in December 2015, which now provides cheaper electricity for north-eastern Poland from Sweden via Lithuania.
We view the Polish government's plans to introduce a capacity market as crucial in allowing new coal power plants under construction or in the planning stage, such as the Ostroleka plant, to be profitable in the long-term. The Polish government is working on a draft bill on a capacity market, which should be ready by end-2016. New capacity mechanisms could start supporting cash flows of power plants by around 2021. The capacity market legislation will be subject to the European Commission's notification.
ENEA's involvement in coal mining - which we view as a higher-risk sector than power generation and distribution - would further increase if the investment in KHW goes ahead as planned. This would have negative implications for ENEA's credit profile unless it is substantially mitigated by other factors such as continuing low dividends. While all state-controlled integrated utilities in Poland now have stakes in coal mining, ENEA is currently the largest investor in terms of production volume and EBITDA after its acquisition of a 64.57% stake in Bogdanka coal mine for PLN1.8bn in 2015.
PGE is less exposed to negative rating pressure from the acquisition of EdF's assets, due to the company's lower leverage and larger scale. However, PGE's rating headroom will largely be eliminated by 2020 by planned high capex and a projected increase in leverage.
Energa, ENEA and PGE have been taking measures to mitigate the credit impact of lower projected cash flows, high capex, and acquisitions plans in higher-risk market segments. In particular, dividends paid in 2016 are significantly lower than in 2015 (PGE: PLN467m vs. PLN1,458m; Energa: PLN203m vs. PLN596m; ENEA: no dividend vs. PLN207m). Additionally, the largest new projects in conventional generation will likely be arranged on a joint venture basis rather than be financed by one company. Companies are also implementing cost-effectiveness initiatives to support their cash flows. We assume these risk-mitigating factors will continue in the future.