Most EMEA emerging markets (EM) integrated utilities have a stable rating despite Fitch Ratings’ expectations of an increase in capex. Links with the state still drive the ratings of most EM integrated utilities. We upgraded the ratings of Abu Dhabi National Energy Company PJSC (AA/Stable) and Saudi Electricity Company (A+/Stable) following the reassessment of the links with the sovereign under the updated Government-Related Entities Rating Criteria, and they are now equalised with the ratings of their respective sovereigns.

We forecast a rise in capex in 2024-2027 leading to negative free cash flow (after M&A) and higher net debt for most companies. We therefore expect an increase in funds from operations (FFO) net leverage in 2024-2027, although it should remain within the rating sensitivities for most issuers (albeit with moderate headroom).

The higher capex for most companies will be mainly in transmission and distribution, followed by power generation, and is subject to considerable execution risks, especially in the case of lower-rated Namibia Power Corporation (Proprietary) Limited (BB-/Stable) and Eskom Holdings SOC Ltd. (B/Stable). For some issuers, the larger part of capex is uncommitted and could be postponed, such as for National Central Cooling Company PJSC (Tabreed; BBB/Stable) and Limited Liability Partnership Kazakhstan Utility Systems (BB-/Stable).

All the firms benefit from their leading positions in power generation and monopoly control over transmission and distribution in their core markets.  Key differentiators include the strength of regulatory frameworks and progress in the energy transition plans.

The regulatory framework varies significantly between the EMs, and overall lags behind those of western Europe. We consider 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 a yearly 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 (AA/Stable).

Full report here.

Tahmina Pinnington-Mannan
Director, Corporate Communications
Fitch Group, 30 North Colonnade, London E14 5GN
tahmina.p-mannan@thefitchgroup.com