Announcements Corporate Rating Alerts

GCR affirms Geregu Power Plc’s national scale long term and short term Issuer ratings of A(NG) and A1(NG) respectively, Outlook Stable.

Lagos, Nigeria, 13 December 2021 – 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 Stable.

Rated Entity / Issue

Rating class

Rating scale

Rating

Outlook / Watch

Geregu Power Plc

Long Term Issuer

National

A(NG)

Stable

Short Term Issuer

A1(NG)

 

Rating Rationale

The ratings accorded to Geregu Power Plc (“Geregu” or “the Company”) reflect its position as one of the major power generating companies in Nigeria, with strong revenue progression and conservative leverage position. However, this is balanced against the high levels of receivables due to the general illiquidity in the Nigerian Electricity Supply Industry, and working capital pressures on the back of large dividend upstreaming amid high capex/debt issue plans.

Geregu’s competitive position is underpinned by its status as one of the major power generating companies in Nigeria, with total installed capacity of 435MW and 6% contribution to the national grid. The Company intends to further increase its scale through the acquisition of a 435MW power plant while embarking on a major overhaul of the existing facility in FY22.

Management and governance assessment is considered neutral to the ratings. However, GCR notes the substantial intercompany receivables reported in respect of huge advance payments for dividend to its parent company, Amperion Power Distribution Company. While this has not warranted any negative adjustment at the moment, an aggressive management behaviour, especially in view of the planned debt-funded expansion could be negatively viewed.

Earnings performance is a neutral rating factor, primarily due to earnings concentration to a sole customer, the Nigerian Bulk Electricity Trading Plc. This notwithstanding, GCR notes the strong revenue progression with a five-year CAGR of 42.7%, resulting in a review high top line of N53.7bn in FY20 (FY19: N42.2bn). This was attributable to increase in energy sales (on the back of steady gas supply) and tariff increases during the period. Furthermore, the EBITDA margin has been sustained at an average of 46% over the cycle, on the back of strong cost management. The bottom line earnings has also been supported by fair value movements in respect of foreign exchange differentials, with pre-tax profit improving to N20.6bn in FY20 (FY19: N15.5bn). Overall, GCR anticipates sound revenue growth over the outlook period supported by the planned optimisation of the existing power plant and the planned strategic acquisition.

Leverage and cash flow is the key rating strength, given the conservative gearing over the years. Although, gross debt registered at N10.2bn at 1H FY21 (from a net ungeared position at FY20) due to working capital facility secured from a commercial bank, net debt to EBITDA remained very strong at 0.07x at 1H FY21. Despite the plan to raise N40bn through bond issuance in the near term, GCR expects the metric to remain below 1x over the outlook period given the anticipated strong earnings and substantial cash holding. Although operating cash flow (“OCF”) coverage of gross debt has trended at the strong range through to FY20, it registered at a negative position during 1H FY21, due to the huge advance payments for dividends. While such payments may continue to exert pressure on OCF over the outlook period, this would likely be cushioned by the expected strong cash generation. The interest coverage has also been sustained at an average of 130x, given the strong earnings and negligible finance costs and is expected to be sustained at strong levels despite the planned debt issue.

Liquidity assessment is also a rating strength as sources vs uses liquidity coverage is estimated to be around 1.7x over the short term. This is predicated on the substantial cash holding of N7.6bn at 1H FY21 and operating cash flows of N29.8bn expected in FY22. Assuming that the proposed bond is not issued, major outflows would only relate to short-term debt redemption N1.9bn and dividend payments, while capex spend would be limited to the plant overhaul, estimated at N21.5bn. However, if the proposed bond is successful, GCR anticipates a capex spend of N46.5bn for plant acquisition and overhauling, which will moderate the liquidity coverage to 1.6x in the short term.

GCR has factored a negative peer comparison into the rating reflecting the continued challenges around collections in the entire power supply value chain resulting in volatile operating cash flow. Consequently, the escalation in receivables continues without a definite payment plan as the various FGN interventions have been exhausted. Likewise, payables have increasingly accumulated to N34bn in FY20 (FY19: N28bn) stated at the original invoiced value. GCR expects these constraints to persist until there is a significant reduction in Aggregate Technical and Commercial Collection Losses (“ATC&C Losses”) which translates into improved liquidity in the entire value chain.

Outlook Statement

The Stable Outlook reflects GCR’s view that earnings will materially increase on the back of capacity expansion which will result in a sustained low gearing metrics as a reasonable level of dividend payment is maintained.

Rating Triggers

Positive rating action is dependent on significant ramp up of earnings margins. Discretionary cash flow coverage of debt remains robust on the back of sound cash generation. Conversely, a rating downgrade could follow a.) aggressive dividend payments, resulting in liquidity pressure; b.) a significant spike in debt, which translate to net debt to EBITDA rising beyond 1x.

Analytical Contacts

Primary analyst

Biyi Baruwa

Analyst: Corporates and Public Entities

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, May 2019

Criteria for Rating Corporate Entities, May 2019

GCR Ratings Scales, Symbols & Definitions, May 2019

GCR Country Risk Score, October 2021

GCR Nigeria Corporate Sector Risk Scores, November 2021

Ratings History

Geregu Power Plc

Rating class

Review

Rating scale

Rating

Outlook/Watch

Date

Long Term Issuer

Initial/Last

National

A(NG)

Stable

September 2020

Short Term Issuer

Initial/Last

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

3.00

Earnings

0.00

Leverage & capital structure

2.00

Liquidity

1.00

Comparative profile

0.00

Group support

0.00

Peer analysis

(2.00)

Total Risk Score

8.25

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:

 

  • 2020 audited annual financial statement, and prior four years annual financial statements;
  • Audited Interim financial statements as at 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;

 



ALL GCR CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS, TERMS OF USE OF SUCH RATINGS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS, TERMS OF USE AND DISCLAIMERS BY FOLLOWING THIS LINK:HTTP://GCRRATINGS.COM. IN ADDITION, RATING SCALES AND DEFINITIONS ARE AVAILABLE ON GCR’S PUBLIC WEB SITE AT WWW.GCRRATINGS.COM/RATING_INFORMATION. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. GCR's CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THIS SITE.

CREDIT RATINGS ISSUED AND RESEARCH PUBLICATIONS PUBLISHED BY GCR, ARE GCR’S OPINIONS, AS AT THE DATE OF ISSUE OR PUBLICATION THEREOF, OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. GCR DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL AND/OR FINANCIAL OBLIGATIONS AS THEY BECOME DUE. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: FRAUD, MARKET LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND GCR’S OPINIONS INCLUDED IN GCR’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. CREDIT RATINGS AND GCR’S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND GCR’S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL OR HOLD PARTICULAR SECURITIES. NEITHER GCR’S CREDIT RATINGS, NOR ITS PUBLICATIONS, COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. GCR ISSUES ITS CREDIT RATINGS AND PUBLISHES GCR’S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING OR SALE.

Copyright © 2022 GCR INFORMATION PUBLISHED BY GCR MAY NOT BE COPIED OR OTHERWISE REPRODUCED OR DISCLOSED, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT GCR’S PRIOR WRITTEN CONSENT. Credit ratings are solicited by, or on behalf of, the issuer of the instrument in respect of which the rating is issued, and GCR is compensated for the provision of these ratings. Information sources used to prepare the ratings are set out in each credit rating report and/or rating notification and include the following: parties involved in the ratings and public information. All information used to prepare the ratings is obtained by GCR from sources reasonably believed by it to be accurate and reliable. Although GCR will at all times use its best efforts and practices to ensure that the information it relies on is accurate at the time, GCR does not provide any warranty in respect of, nor is it otherwise responsible for, the accurateness of such information.GCR adopts all reasonable measures to ensure that the information it uses in assigning a credit rating is of sufficient quality and that such information is obtained from sources that GCR, acting reasonably, considers to be reliable, including, when appropriate, independent third-party sources. However, GCR cannot in every instance independently verify or validate information received in the rating process. Under no circumstances shall GCR have any liability to any person or entity for (a) any loss or damage suffered by such person or entity caused by, resulting from, or relating to, any error made by GCR, whether negligently (including gross negligence) or otherwise, or other circumstance or contingency outside the control of GCR or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits) suffered by such person or entity, as a result of the use of or inability to use any such information. The ratings, financial reporting analysis, projections, and other observations, if any, constituting part of the information contained in each credit rating report and/or rating notification are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities. Each user of the information contained in each credit rating report and/or rating notification must make its own study and evaluation of each security it may consider purchasing, holding or selling. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY GCR IN ANY FORM OR MANNER WHATSOEVER.