Announcements Corporate Rating Alerts

GCR affirms GEL Utility Limited’s national scale issuer ratings, Outlook Stable.

Lagos, 27 October 2021 – GCR Ratings (“GCR”) has affirmed GEL Utility Limited’s national scale long and short-term Issuer ratings of BBB(NG) and A3(NG) respectively, with the Outlook accorded as Stable.

Rated Entity / Issue Rating class Rating scale Rating Outlook / Watch
GEL Utility Limited Long Term Issuer National BBB (NG) Stable
Short Term Issuer A3(NG)

Rating Rationale

GEL Utility Limited’s (“GEL” or “the Company”) ratings are underpinned by the stable revenue stream backed by the long-term power purchase contract with Nigerian National Petroleum Corporation (“NNPC”) and the sound earnings margin. However, the ratings remain constrained by the current single clientele and moderately weak leverage.

The competitive position is a key rating constraint, as it is significantly smaller than other rated peers, with only a single large customer. Nevertheless, GEL enjoys contractual protection and faces no real competition within it geographic area. Efforts to expand its customer base have resulted in some small independent power off-take (cumulative 2MW), but this is not expected to translate to significant scale over the medium term. While other ongoing projects are at different stages of negotiations, these have been further delayed by the COVID-19 disruptions and bureaucracies at NNPC, with completion likely only in the long term.

The earnings assessment is constrained by the lack of diversification, albeit GCR takes cognisance of the steady revenue progression underpinned by the embedded contractual tariff escalation, and the high fixed charge which ensures that 80% of the capacity charge is paid even if the customer does not take the power dispatched. Amid persistent Naira depreciation, earnings quality is further supported by the large proportion of USD receipts (70%) per the contract. Given the low operating cost base, the EBITDA margin is strong (review average: 72.5%) and well above the peers, but the overall quantum is low in line with the business size. GEL does, however, retain substantial unutilised generating capacity, thus onboarding a large new customer could significantly enhance its earnings.

GEL exhibits moderately weak leverage. Having refinanced the First Bank loan with the bond proceeds in FY19, gross debt has gradually reduced from N16.2bn to N15.6bn in FY20 (1H FY21: N15.4bn). Although operating cash flows have been strong, its coverage of debt has been low at around 18%-20% (and is expected to remain within this range over the medium term), attributable to the high debt level. Similarly, interest coverage has trended at the low range of 2x-3.5x over the review period and reported consecutive declines to 1.7x in FY20 because of the high finance cost. We forecast that there could be marginal improvement to around 2x-2.7x in FY21-23, albeit still weak. Conversely, net debt to EBITDA is moderate, registering at 3.2x at FY20 (FY19: 3.9x) and projected to gradually improve to the 2.1x-2.7x range in FY21-23, on the back of firmer earnings and the amortisation of debt. The supplier debt of N2.5bn matures in FY23, but otherwise there are no maturity concentrations because the bond is amortising.

Liquidity is fairly good on the back of robust cash flows versus moderate debt redemption and minimal capex. We forecast a cumulative debt repayment of around N1.5bn for the 18-month period to end-2022 (FY23: N2.6bn), while ongoing capex spend will likely be in the range of N0.8bn-N1bn, primarily related to maintenance of existing facility and potential power projects underway. This will primarily be funded through internal cash generations, and cash holdings, which we estimate to be around N1.6bn over the next six months, with further operating cash flows of N2.9bn in FY22 (FY23: N3.3bn). Overall, this translates to adequate liquidity sources versus uses coverage of 1.7x over the next 18 months.

Outlook Statement

The Stable Outlook reflects GCR’s expectations that earnings will remain stable, underpinned by the long term contractual pricing. Cash inflows should thus be sufficient to settle all debt service costs.

Rating Triggers

Positive rating action is possible over the medium term if GEL attains greater diversification of its customer base, which translates to meaningful scale and significant growth in earnings. Conversely, the ratings could be downgraded if debt rises materially beyond expectation leading to significant deterioration in gearing.

Analytical Contacts

Primary analyst Samuel Popoola Analyst: Corporate and Public Sector
Lagos, Nigeria Samuel@GCRratings.com +234 1 904 9462
Committee chair Eyal Shevel Sector Head: Corporate and Public Sector Ratings
Johannesburg, ZA Shevel@GCRratings.com +27 11 784 1771

Related Criteria and Research

Criteria for the GCR Ratings Framework, May 2019
Criteria for Rating Corporate Entities, May 2019
GCR Ratings Scales, Symbols & Definitions, May 2019
GCR Nigeria Country Risk Scores, October 2021
GCR Nigeria Corporate Sector Risk Scores, August 2021

Ratings History

GEL Utility Limited

Rating class Review Rating scale Rating Outlook Date
Long Term Issuer Initial National BBB+(NG) Stable December 2018
Short Term Issuer Initial National A2(NG)
Long Term Issuer Last National BBB(NG) Rating Watch June 2020
Short Term Issuer Last National A3(NG)

Risk Score Summary

Rating Components & Factors Risk scores
Operating environment 7.00
Country risk score 3.75
Sector risk score 3.25
Business profile (1.00)
Competitive position (1.00)
Management and governance 0.00
Financial profile 0.00
Earnings profile 0.00
Leverage and Capital Structure (0.50)
Liquidity 0.50
Comparative profile 0.00
Group support 0.00
Peer analysis 0.00
Total Score 6.00

Glossary

Cash Flow The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.
Cash Funds that can be readily spent or used to meet current obligations.
Debt An obligation to repay a sum of money. More specifically, it is funds passed from a creditor to a debtor in exchange for interest and a commitment to repay the principal in full on a specified date or over a specified period.
Diversification Spreading risk by constructing a portfolio that contains different exposures whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in.
Interest Cover Interest cover is a measure of a company’s interest payments relative to its profits. It is calculated by dividing a company’s operating profit by its interest payments for a given period.
Leverage Regarding corporate analysis, leverage (or gearing) refers to the extent to which a company is funded by debt.
Liquidity The speed at which assets can be converted to cash. It can also refer to the ability of a company to service its debt obligations due to the presence of liquid assets such as cash and its equivalents. Market liquidity refers to the ease with which a security can be bought or sold quickly and in large volumes without substantially affecting the market price.
Short Term Current; ordinarily less than one year.

Salient Points of Accorded Ratings

GCR affirms that a.) no part of the rating 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 rating has been disclosed to GEL Utility Limited. The rating above was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the rating.

GEL Utility Limited participated in the rating process via telephonic management meetings, and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible. The information received from GEL Utility Limited and other reliable third parties to accord the credit ratings included:

  • 2020 audited annual financial statement, and prior four years annual financial statements;
  • management accounts for the period to 30 June 2021;
  • 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;


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