Lagos, Nigeria, 11 August 2022 - GCR Ratings ("GCR") has affirmed Geregu Power Plc's national scale long-term and short-term Issuer ratings of A(NG) and A1(NG) respectively, with the Outlook accorded as Evolving.
Rated Entity / Issue Rating class Rating scale Rating Outlook / Watch
Geregu Power Plc Long Term Issuer National A(NG) Evolving
Short Term Issuer A1(NG) --
The ratings accorded to Geregu Power Plc ("Geregu" or "the Company") reflect its sustained position as a leading Nigerian power generating company underpinned by its relatively high generating capacity which has supported sound earnings trajectory over the cycle. However, the ratings are constrained by the inherent illiquidity in the power value chain, the mono customer base and the expected pressure on leverage metrics in the near term.
Geregu's competitive position is expected to be further enhanced by the ongoing plan to increase production capacity to 870 megawatts ("MW"), from 435MW currently, via an acquisition of one of the federal government's power generating assets. In addition, the Company plans to overhaul the existing power plant to achieve higher efficiency. If successful, the resultant contribution to the national grid is estimated at about 20% (holding constant the current national generating capacity of about 4500MW to 5,520MW).
Revenue progression has been solid over the cycle, on the back of higher energy sale and upward review of electricity tariffs. During FY21, the top line grew by 24% peaking at c.N71bn and the EBITDA margin improved to 45% (FY20: 42.6%), on the back of tighter cost controls. GCR expects slower revenue growth in FY22-23 but expects a significant ramp up in revenue and earnings margin in FY24 once the ongoing projects become operational. This notwithstanding, the earnings profile remains constrained by the concentration of power evacuation/sale through the Nigerian Bulk Electricity Trading Company Plc ("NBET"). That said, GCR foresees that the plan to diversify power sale directly to eligible customers (in line with the Eligible Customers policy) is unlikely to crystalise within the rating outlook period.
Geregu has maintained a conservative leverage profile over the review period, as the Company has made limited recourse to debt given its strong cash generative capacity. As such, while gross debt increased to N9.3bn at December 2021, net debt to EBITDA remained strong at 0.16x compared to the ungeared position reported since FY19. However, Geregu is in the process of raising N60bn debt from the capital markets and a further N35bn in loans from commercial banks, this should see the leverage metric spike to c.2x in FY23. Nevertheless, despite the substantial dividend upstreaming amid ongoing capex plans, we expect the strong operating cash flows ("OCF") coverage of debt to moderate to between 25%-40% over the outlook period as debt escalates. Similarly, GCR expects EBITDA coverage of net interest to reduce to below 7x in FY23-24 (period average: 853x) as finance cost kicks in, with respect to the proposed debt.
GCR's liquidity assessment focuses on the sources versus uses coverage for FY23-24 when the net proceeds of the proposed bonds and other external debt would have been utilised for the overhaul, and the new plant is acquired and operational, thus giving a true position of cash holdings and operating cash flows. That said, the liquidity coverage is estimated at 1.3x and 2.6x for FY23 and FY24 respectively. This is predicated on expected net operating cash flows of about N21bn for FY23 and the anticipated cash holdings of about N130bn by early 2023 (through the proposed debt issues), which will be utilised to finance a sizeable capex spend of N110bn and repay maturing debt of N3.6bn during FY23. While cash is expected to reduce significantly by end-December 2023, the expanded operations should support stronger cash flows in the coming years, sufficiently catering for the little capex and short-term debt redemption during FY24.
The ratings remain constrained by the perennial collection inefficiency at the distribution end of the power value chain. This continues to impact generating companies ("Gencos"), with increasing accumulation of receivables balances placing working capital pressures on all on-grid Gencos, notwithstanding the historical interventions of the federal government through payment assurance guarantees. Although, GCR notes that the high receivables are somewhat counterbalanced by trade payables to government related gas suppliers on mutual understanding, but it is unable to ascertain the legality of such deferred payments. GCR expects these constraints to persist until there is a significant reduction in Aggregate Technical and Commercial Collection Losses ("ATC&C Losses"), improved collection efficiencies via adequate metering and a fully cost-reflective tariff system.
The Evolving Outlook reflects the mixed expectation of the outcome of the entire fundraising plan, completion of the planned projects and the turnaround in revenue as expected. Furthermore, if the debt issue is successful but project execution delays longer than anticipated due to exogenous factors, this could exert further pressure on leverage metrics and elevate refinancing risks.
Positive rating action is dependent on a demonstrated ability to diversify the customer base and/or a turnaround of the liquidity condition of the Nigerian power sector. Conversely, a rating downgrade could follow i.) aggressive dividend payments amid ongoing expansion which exerts pressure on liquidity; ii) underperformance of earnings, likely due to production loss owing to delays in completing the planned overhauls of both the existing and new plants.
Primary analyst Biyi Baruwa Analyst: Corporates and Municipals
Lagos, Nigeria Biyi@GCRratings.com +234 1 904 9462
Committee chair Matthew Pirnie Group Head of Ratings
Johannesburg, ZA Matthewp@GCRratings.com +27 11 784 1771
Related Criteria and Research
Criteria for the GCR Ratings Framework, January 2022
Criteria for Rating Corporate Entities, January 2022
GCR Ratings Scales, Symbols & Definitions, May 2022
GCR Country Risk Scores, June 2022
GCR Nigeria Corporate Sector Risk Scores, April 2022
Geregu Power Plc
Rating class Review Rating scale Rating Outlook/Watch Date
Long Term Issuer Initial National
A(NG) Stable September 2020
Short Term Issuer Initial A1(NG)
Long Term Issuer Last National A(NG) Stable December 2021
Short Term Issuer Last National A1(NG) --
Risk Score Summary
Rating Components & Factors Risk score
Operating environment 7.00
Country risk score 3.75
Sector risk score 3.25
Business profile 0.25
Competitive position 0.25
Management and governance 0.00
Financial profile 2.50
Leverage & capital structure 1.50
Comparative profile (2.00)
Group support 0.00
Peer analysis (2.00)
Total Risk Score 7.75
SALIENT POINTS OF ACCORDED RATINGS
GCR affirms that a.) no part of the ratings process was influenced by any other business activities of the credit rating agency; b.) the ratings were based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
The credit ratings have been disclosed to Geregu Power Plc. The ratings above were solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the ratings.
Geregu Power Plc participated in the rating process via tele-conferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible. The information received from Geregu Power Plc and other reliable third parties to accord the credit ratings included:
2021 audited annual financial statement, and prior four years annual financial statements;
Industry comparative data and regulatory framework and a breakdown of facilities available and related counterparties;
Information specific to the rated entity and/or industry was also received.
Rating Agency Website: http://globalratings.net/
SeeNews does not endorse in any way, the views, opinions or recommendations expressed above. The use of the information is subject to the terms and conditions as published by the original source, which you have to read and accept in full prior to the execution of any actions taken in reliance on information contained herein.