Most integrated utility companies in emerging markets (EM) in the Europe, Middle East, and Africa (EMEA) region have stable credit ratings despite Fitch Ratings’ expectation of increased capital expenditure (capex) in the coming years.
In a press statement Fitch said that the ratings of most EM integrated utilities are driven by their strong ties with their respective governments. The agency recently upgraded the ratings of Abu Dhabi National Energy Company PJSC (ADNOC) to AA/Stable and Saudi Electricity Company to A+/Stable after reassessing their links to their sovereign governments under the updated Government-Related Entities Rating Criteria. Both companies now have ratings that are aligned with their respective sovereign ratings.
Fitch Ratings anticipates a rise in capex across most companies in 2024-2027, leading to negative free cash flow (after mergers and acquisitions) and higher net debt. The agency expects an increase in funds from operations (FFO) net leverage in 2024-2027, although it should remain within the rating sensitivities for most issuers, with moderate headroom.
The increase in capex will be primarily focused on transmission and distribution, followed by power generation. The agency acknowledges that there are considerable execution risks, particularly for lower-rated companies such as Namibia Power Corporation (Proprietary) Limited and Eskom Holdings SOC Ltd. For some issuers, a significant portion of the capex is uncommitted and could be postponed, as seen in National Central Cooling Company PJSC (Tabreed) and Limited Liability Partnership Kazakhstan Utility Systems.
All of the companies examined benefit from their leading positions in power generation and monopoly control over transmission and distribution within their core markets. However, key differentiators exist in the strength of regulatory frameworks and progress in energy transition plans.
The regulatory framework varies significantly across EM countries, generally lagging behind those in western Europe. Fitch Ratings views the regulatory frameworks in Abu Dhabi and Saudi Arabia as more developed than those in Kazakhstan, South Africa, and Namibia. The latter face higher political risk and rely on annual tariff-setting mechanisms.
The regulatory framework for district cooling remains significantly less developed than that of regulated networks and has yet to establish a track record, despite the establishment of a regulator for district cooling in Dubai and Abu Dhabi.
