The rating affirmation reflects Moody's expectation that HEP will be able to maintain a financial profile, despite the current constrained power prices and risks that these could continue, given its modest debt leverage and its business mix, Moody's said in a press release. "More particularly, the rating affirmation recognises HEP's financial flexibility to withstand a potential prolonged period of lower power prices."
As seen elsewhere in Europe, Balkan power prices have declined over the past year, but remain somewhat higher than those in Western Europe, given the very limited interconnector capacity. HEP is the dominant power supplier in Croatia, with an approximately 84% share in the domestic retail electricity market, Moody's said.
HEP's rating affirmation reflects its vertically integrated position in the Croatian electricity market, where the group benefits from an 84% market share; its electricity-generation mix, with a high share of low cost output; and the group's sound financial profile with low leverage levels and strong credit metrics.
However, the ratings are significantly constrained by HEP's lack of diversification in terms of market presence; the developing profile of the regulatory framework in Croatia; HEP's underlying earnings volatility driven by its dependence on volatile hydro-based electricity generation; and its considerable investment programme, which includes new generation capacity and replacement of an aging asset base.
The stable outlook on HEP's Ba2 ratings reflects Moody's view that the group will manage its financial profile in line with the current rating category; and that its rating would remain unchanged should limited negative pressure develop on the Croatian sovereign rating.
Given the negative outlook on the Croatian sovereign rating, Moody's does not expect any upward rating pressures in the near term. Nevertheless, HEP's rating could come under positive pressure if the company is able to demonstrate a more stabilised operating and cash flow profile. This might be achieved by a change in the current generation profile and/or a change in the regulatory environment.
HEP's earnings remain exposed to a number of factors outside of management control, most notably domestic rainfall, commodity and regional power prices. As the dominant energy company in the country, HEP is also exposed to any additional loss of market share in the supply segment as a result of market liberalisation. Downward pressure could develop if any of these risks translate into a weakening of HEP's liquidity and/or financial position, Moody's said.