Geregu Power to Raise N95bn from Capital Market, Banks
Geregu Power Plc, a company chaired by billionaire investor Femi Otedola is in the process of raising N60 billion from the capital markets and a further N35 billion in loans from commercial banks, according to GCR Ratings.
In a rating note, an emerging market rating agency GCR 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 evolving. The company is in a mood to improve efficiency as it eyes to contribute 20% of electricity supply in Nigeria.
It said the ratings accorded to Geregu Power Plc reflect the company’s sustained position as a leading Nigerian power generating company underpinned by its relatively high generating capacity which has supported a sound earnings trajectory over the cycle, according to the firm.
However, the affirmed ratings, according to GCR, are constrained by the inherent illiquidity in the power value chain, the mono customer base and the expected pressure on leverage metrics in the near term.
Geregu’s competitive position is expected to be further enhanced by the ongoing plan to increase production capacity to 870 megawatts (MW), from 435MW currently, via an acquisition of one of the federal government’s power generating assets, according to the rating note
In addition, the Company plans to overhaul the existing power plant to achieve higher efficiency. “If successful, the resultant contribution to the national grid is estimated at about 20% -holding constant the current national generating capacity of about 4500MW to 5,520MW”, GCR stated.
It explained that the company’s revenue progression has been solid over the cycle, on the back of higher energy sales and an upward review of electricity tariffs. READ: Geregu Power, Chaired by Femi Otedola, to Raise N40bn Bonds
During 2021, the top line grew by 24% peaking at about N71 billion and the earnings before interest tax depreciation and amortisation (EBITDA) margin improved to 45% from 42.6% in 2020, on the back of tighter cost controls.
In the financial year 2022 to 2023, GCR expects the company to see slower revenue growth. However, it projected a significant ramp up in revenue and earnings margin in 2024 once the ongoing projects become operational.
This notwithstanding, the earnings profile remains constrained by the concentration of power evacuation/sale through the Nigerian Bulk Electricity Trading Company Plc (NBET), according to the rating note.
That said, GCR foresees that the plan to diversify power sales directly to eligible customers – in line with the Eligible Customers policy- is unlikely to crystalise within the rating outlook period.
Geregu has maintained a conservative leverage profile over the review period, as the Company has made limited recourse to debt given its strong cash generative capacity.
As such, while gross debt increased to N9.3 billion in December 2021, net debt to EBITDA remained strong at 0.16x compared to the ungeared position reported since 2019.
However, Geregu is in the process of raising N60 billion debt from the capital markets and a further N35 billion in loans from commercial banks, this should see the leverage metric spike to about 2x in 2023.
Nevertheless, despite the substantial dividend upstreaming amid ongoing capital expenditure plans, analysts said they expect the strong operating cash flow coverage of debt to moderate to between 25%-40% over the outlook period as debt escalates.
Similarly, GCR expects EBITDA coverage of net interest to reduce to below 7x in 2023-2024 (period average: 853x) as finance cost kicks in, with respect to the proposed debt.
GCR’s liquidity assessment focuses on the sources versus uses coverage for 2023-24 when the net proceeds of the proposed bonds and other external debt would have been utilised for the overhaul.
It added that the new plant is acquired and operational, thus giving a true position of cash holdings and operating cash flows. The company’s liquidity coverage is estimated at 1.3x and 2.6x for 2023 and 2024 respectively.
This is predicated on expected net operating cash flows of about N21 billion for 2023 and the anticipated cash holdings of about N130 billion by early 2023 (through the proposed debt issues), which will be utilised to finance a sizeable capital expenditure spend of N110 billion and repay the maturing debt of N3.6 billion during 2023.
While cash is expected to reduce significantly by end-December 2023, the expanded operations should support stronger cash flows in the coming years, sufficiently catering for the little capital expenditure and short-term debt redemption during 2024.
The ratings remain constrained by the perennial collection inefficiency at the distribution end of the power value chain.
This continues to impact generating companies (Gencos), with increasing accumulation of receivables balances placing working capital pressures on all on-grid Gencos, notwithstanding the historical interventions of the federal government through payment assurance guarantees.
Although, GCR notes that the high receivables are somewhat counterbalanced by trade payables to government-related gas suppliers on mutual understanding, but it is unable to ascertain the legality of such deferred payments.
GCR expects these constraints to persist until there is a significant reduction in Aggregate Technical and Commercial Collection Losses, improved collection efficiencies via adequate metering and a fully cost-reflective tariff system.
Outlook Statement
The evolving outlook reflects the mixed expectation of the outcome of the entire fundraising plan, completion of the planned projects and the turnaround in revenue as expected, according to the rating note.
GCR Ratings said if the debt issue is successful but project execution delays longer than anticipated due to exogenous factors, this could exert further pressure on leverage metrics and elevate refinancing risks. #Geregu Power to Raise N95bn from Capital Market, Banks
