BAKU, Azerbaijan, July 16
By Tamilla Mammadova – Trend:
S&P Global is assigning 'B' issue rating to the proposed bond to Georgian Global Utilities JSC (GGU), Trend reports citing the S&P's report.
GGU is a relatively small private water and electricity utility, established in Georgia where it has a healthy position.
As reported, although GGU is smaller than other rated utilities and has limited geographic diversity, it is well positioned in its home market where it has a monopoly over the provision of water to about one-third of Georgia's population.
"The positive outlook on the issuer rating indicates that we could raise the rating if the company's ratios improve substantially above 12 percent in 2021, and we are comfortable that it is insulated from its parent company, Georgia Capital JSC," the report said.
According to S&P, about 55 percent of the group's EBITDA comes from its regulated water utility business and about 45 percent from renewable electricity generation, mostly hydropower.
"The company has 240 megawatts of installed capacity, making it relatively small compared with other rated utilities. It has yet to develop a track record as a stand-alone entity given that it was created in 2020 through the merger of existing water and electricity operations," the report said.
As reported, GGU generated only 4.8 percent of Georgia's electricity on a pro forma basis in 2019. Its water leakage rate remains high versus other rated utilities, at 40.4 percent in 2019, but it is investing to reduce this. The leakage rate was 45.1 percent in 2017. GGU faces relatively high country risk in Georgia, including a weak domestic financial system, relatively low average income levels, an evolving regulatory framework, and a volatile exchange rate.
"GGU is well positioned in its home market as a monopoly provider of essential water services for Georgia's capital city Tbilisi and neighboring Mtskheta and Rustavi," the report said.
It serves about 1.4 million of Georgia's total population of about 4 million inhabitants. GGU operates nine generating plants across the country, and also benefits from the inherently low marginal costs and green nature of hydropower electricity generation. Therefore, prices for domestic hydropower sales to direct customers and under power purchase agreements (PPAs) with the government are favorable. Electricity revenue, which is about 30 percent of total revenue, is denominated in USD, said the report.
"We expect GGU to benefit from an increase in the water tariff, but the exact terms of Georgia's next water regulatory period, which will start in 2021, have yet to be decided. We view Georgia's water tariff regulation as generally supportive, but evolving. The track record is limited, given the first regulatory period started only in 2018. As a result, we cannot rule out additional fine-tuning and changes," the S&P noted.
According to the report, in the first year of the regulatory period (2018-2020), GGU's water revenue increased by 14 percent (23.8 percent tariff increase for the population and a 0.4 percent decrease for legal entities), which enabled GGU to invest heavily in water and electricity assets in the current regulatory period. The next tariff revision is expected in 2021.
"We expect the weighted-average water tariff to increase by at least 15 percent, and the regulated asset base (RAB) to grow by 23.5 percent, causing water revenue to grow by 24 percent versus 2020. The regulator has not yet established the actual parameters, however. We also consider that high nominal RAB should be read in the context of Georgia's high interest rate environment and the company's high investment needs," the report said.
"Under our base case, we expect GGU's EBITDA from the hydropower business to increase by about 30 percent in 2021, because of both volumes and prices. We anticipate that the company's annual electricity generation could increase to 450-470 gigawatt hours (GWh) in 2021 from the current 390 GWh-400 GWh, and total operational installed capacity to 240 MW from 221 MW after the repair of existing capacity," the company said.
S&P also expects GGU's weighted-average electricity price to increase from the current 5.0-5.1 cents/kWh to 5.5 cents/kWh in 2021 and to fluctuate around 5.3 cents-5.5 cents thereafter.
"We expect GGU's leverage to increase in 2020, after the merger between the existing water and electricity operations. We expect GGU's dividend to be moderate, despite the recent downgrade of the parent, Georgia Capital," the reports said.
S&P views GGU as a large, but nonstrategic, subsidiary of Georgia Capital.
"On April 3, 2020, we downgraded Georgia Capital to 'B' from 'B+' because of its higher loan-to-value ratio and lower dividend income. GGU is a large investment for Georgia Capital and has historically been one of the two main dividend contributors to Georgia Capital (the other being Bank of Georgia)," the company said.
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