Moody’s Investors Service announced on Tuesday that it downgraded to Baa2 from Baa1 the issuer rating and the senior unsecured ratings of Estonia's state-owned energy giant Eesti Energia AS, informs LETA.
Concurrently, Moody’s has affirmed the short-term P-2 rating of Eesti Energia. The outlook on the ratings is stable.
Moody’s said that the rating action reflects the development of Eesti Energia's business risk profile in light of the increasing integration of the Baltic and Nordic power markets, coupled with generally weak levels of wholesale power prices and challenges associated with the development of shale oil activities.
While Eesti Energia's rating is underpinned by the group's dominant position in Estonia as a vertically-integrated utility, the company's small scale and concentration on its CO2-intensive oil-shale-based generation portfolio constrain its rating, Moody’s said. In the short term, Eesti Energia's hedging strategy will help protect its earnings from the effects of weak power prices. Moreover, the company will further benefit from the current low CO2 prices. However, Moody’s considers that the competitive position of Eesti Energia's oil-shale-based generation assets may weaken over time as the market becomes more integrated with the Nordic region, which has a more diversified generation base. This integration will follow the coming on line of the Estlink2 additional cable connection to Finland this year.
The Baa2 rating also takes into account Eesti Energia's strategy, which includes the development of shale oil activities. Moody’s considers such activities to carry a higher risk than the group's core utility services. The rating agency notes the execution risk related to the planned investment in the company's shale oil facilities, as evidenced by production delays at the Enefit280 facility from 2012. Moody’s understands that Eesti Energia may undertake further investments into shale oil facilities in the long-term but believes that the company will continue to prudently manage spending in this area and consider balance-sheet strengthening measures, if it were to undertake any material investments.
Eesti Energia falls under Moody’s rating methodology for Government-Related Issuers (GRIs) given its 100% ownership by the Government of Estonia (A1 stable). The Baa2 rating incorporates a one-notch uplift for potential support from the company's owner. Moody’s assigns a baseline credit assessment (BCA) -- a measure of standalone credit quality -- of baa3 to Eesti Energia, which Moody’s has lowered from the previous BCA of baa2.
Moody’s says that Eesti Energia's financial profile has deteriorated over the past few years as a result of the implementation of a sizeable investment programme. The group's committed investments remain high in the near term, albeit below the levels in 2011-12 due to finalisation of several projects. In case the company decides to invest further into shale oil activities, negative free cash flow generation may persist over the medium-to-long term.
Eesti Energia generates 90% of Estonia's electricity and around 17% of its heating needs, owning and operating most of its distribution networks. Eesti Energia also owns 100% of Estonia's principal supplier of oil shale, the country's long-term primary fuel source for electricity generation. Eesti Energia is 100% owned by the Government of Estonia.