Lagos, 30 September 2020 — Global Credit Ratings has assigned long term and short term national scale Issuer ratings of A(NG) and A1(NG) respectively to Geregu Power Plc, with the ratings placed on Stable Outlook. The ratings expire in September 2021.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Geregu Power Plc (“Geregu or the Company”) based on the following key criteria:
Geregu Power Plc operates one of the unbundled gas-fired electric power generating plants, domiciled at Itobe-Ajaokuta Express Road, Ajaokuta, Kogi State, with an installed capacity of 435MW. Revenue primarily derive from the power purchase agreement executed with Nigeria to the Nigerian Electricity Bulk Trading Plc (“NBET”) to supply electric power to the national grid. A five-year CAGR of 42.3% in revenue was reported to FY19 and GCR considers the huge power supply-demand gap and the systemic importance of the sector supportive of future earnings. This is evidenced by the very strong 1H FY20 (above projections) despite the COVID-19 crisis and its attendant effects. However, operations remain susceptible to gas supply disruptions as evidenced by the slight decline reported in revenue in FY18.
The rating is also supported by the low economic cyclicality of the Nigerian power generation sector due to the critical nature of the service being provided, while competition is perceived to be low due to huge supply/ demand imbalance. However, key structural challenges such as gas shortages due to pipeline vandalism, poor transmission and distribution infrastructures have constrained final output below the level necessary to operate efficiently. These perennial challenges, and the prolonged regulatory and institutional misalignment constitute downside risks.
More significantly, the industry is also plagued with poor collections by the power distribution companies (the collection agent for the industry), leading to irregular and insufficient payments by NBET, the sole off-taker of all power generated. This has resulted in significant liquidity pressure and inability to honour payment terms with gas supplier. Some government support is now provided through domestic gas supply obligations policy, which allows Geregu to defer payments to its supplier. Cash flow and liquidity pressure have thus eased, as evidenced by the positive operating cash flow reported over the review period.
Geregu has reported strong earnings margins, with the normalised gross margin averaging 46% over the past four years. Operating expenses have been well managed over the years. As such, the EBITDA margin has registered above 40% since FY17. GCR expects the strong margins to be sustained, barring any non-cost reflective policies in terms of gas price and/or electricity tariff.
As a result of the positive cash flows, the Company has not required external debt funding since some debt was obtained in FY14 to fund the initial overhaul of the electric power generating plant, but which was fully repaid in 1Q FY20. However, sizeable depreciation provisions on the power generating plant point to the considerable amount of additional capital that is required to meet contractual commitment to replace/upgrade the plant. Although longer term capex plans will likely require a portion of debt funding, this should not have a negative impact on Geregu’s financial profile if strong profitability is maintained and the projects are rolled out in stages
Positive rating movement is dependent on increased capacity and earnings diversification, which translates to an improved earnings and strong cash flow over the medium term. Conversely, materially adverse regulatory developments, and deterioration in debtor’s book could result in a rating downgrade.
NATIONAL SCALE ISSUER RATINGS HISTORY
|Long term||A(NG)||Stable||September 2020|
|Short term||A1(NG)||Stable||September 2020|
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APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Master Criteria for Rating Corporate Entities, updated February 2018
Glossary of Terms/Ratios (February 2018)
RATING LIMITATIONS AND DISCLAIMERS
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SALIENT FEATURES 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; c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the ratings expire in September 2021.
Geregu Power Plc participated in the rating process via face-to-face management meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The credit ratings have been disclosed to Geregu Power Plc.
The information received from Geregu Power Plc to accord the credit rating included;
- 2019 audited annual financial statements (plus four years of comparative numbers),
- 6-months management accounts to 30 June 2020
- 2020 to 2023 forecast
- industry comparative data and regulatory framework
- a completed rating questionnaire
The ratings above were solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the ratings.