Moody’s Confirms ‘Ba2’ Credit Rating for HEP

The confirmation of the rating reflects expectations, Moody’s states in a press release, that HEP will be able to maintain its financial profile, despite current energy price constraints and risks that such a situation may persist, given HEP’s modest level of debt and the company’s business mix.

Moody’s agency confirmed on Friday the valid ‘Ba2’ credit rating of Hrvatska elektroprivreda (HEP) and stable outlook due to the company’s good financial position.

The confirmation of the rating reflects expectations, Moody’s states in a press release, that HEP will be able to maintain its financial profile, despite current energy price constraints and risks that such a situation may persist, given HEP’s modest level of debt and the company’s business mix.

– More precisely, the confirmation of the rating acknowledges HEP’s financial flexibility to withstand a possible prolonged period of lower electricity prices, Moody’s stated.

Like elsewhere in Europe, electricity prices in the Balkans have fallen over the past year, but are somewhat higher compared to prices in Western Europe, given the very limited interconnection capacities. HEP dominates the Croatian market, with a share of approximately 84 percent in the retail electricity market.

The confirmation of HEP’s rating reflects its vertically integrated position in the Croatian electricity market, where the company benefits from an 84 percent share, its production mix, with a high share of cheaper electricity production, and a healthy financial profile with low levels of debt and strong credit metrics.

On the other hand, the rating is constrained by HEP’s lack of diversification in terms of market presence, the development of the regulatory framework in Croatia, earnings volatility due to dependence on the instability of hydro production, and a significant investment program, which includes new production capacities and the replacement of outdated assets.

The stable outlook of HEP’s rating reflects Moody’s assessment that the company will maintain its financial profile in line with the rating category and that its rating will remain unchanged if there is negative pressure on Croatia’s credit rating.

Given the negative outlook for Croatia’s rating, Moody’s does not expect pressure to increase HEP’s rating in the short term. Nevertheless, HEP’s rating could rise if the company demonstrates a more stable business and cash flow profile. This could be achieved in the event of changes in the current production profile and/or changes in the regulatory environment.

HEP’s earnings remain exposed to numerous factors that the company’s management cannot influence, such as precipitation and raw material and energy prices in regional markets, Moody’s states.

As the dominant company in the country, HEP is also exposed to potential further reductions in its market share in the supply segment due to market liberalization. If any of these risks result in a weakening of HEP’s liquidity and/or financial position, the company’s rating could come under negative pressure, concludes Moody’s.