Fitch Assigns Taiwan Smart Electricity First-Time 'A' Global Rating and 'AA+(twn)' National Rating with Stable Outlook

Fitch Ratings has assigned Taiwan Smart Electricity & Energy Co., Ltd. (TSEE) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) of 'A' and a National Long-Term Rating of 'AA+(twn)'. The Outlook is Stable for the IDRs and national rating.

Fitch has also assigned a Short-Term IDR of 'F1' and National Short-Term Rating of 'F1+(twn)' in accordance with the Long-Term IDR of 'A' and National Long-Term Rating of 'AA+(twn)', respectively.

TSEE is rated under our Government-Related Entities (GRE) Rating Criteria. We "look through" TSEE's immediate shareholders to the Taiwan government (AA/Stable) as we regard the company as a public policy entity with strong links to the government. The ratings reflect our assessment of the Taiwan government's responsibility and incentives to support the company under Fitch's Government-Related Entities Rating Criteria and National Scale Rating Criteria, in conjunction with the SCP assessment under our Public Policy Revenue-Supported Entities Rating Criteria.

KEY RATING DRIVERS
Support Score Assessment 'Strong expectations'
We have strong expectation that extraordinary support from the government of Taiwan to TSEE would be available if needed, as reflected in a support score of 20 out of a maximum 60 under our GRE criteria. This is based on the government's responsibility and incentive to provide support, as assessed below.

Responsibility to Support
Decision Making and Oversight 'Strong'
The government is heavily involved in the design and establishment of TSEE. We expect the government to maintain majority ownership in TSEE via its related entities to have strong influence over the entity. The GREs will hold 52.3% of the shares in TSEE by end-2025 and will appoint four of the seven members on the board of directors. Any transfer of TSEE shares will require approval from at least 50% of shares under the shareholder agreement, ensuring stable government control. TSEE frequently reports its performance to the Ministry of Economic Affairs, which also conducts ad-hoc and regular appraisals of the company.

Precedents of Support 'Strong'
TSEE has not needed any financial support apart for the initial capital injection that will reach TWD1.65 billion by end-2025. However, local GRE peers in the same industry or with similar energy transition initiatives have benefitted from government support to maintain their financial profiles. We expect TSEE to require minimal recurring support from the government budget as its shareholders will ensure the company meets its obligations by taking over contracts in default.
TSEE's shareholders have strong credit quality, bolstering their ability to assume defaulted contracts. In particular, the GRE shareholders consume over 5,000 GWh of electricity per year and have capacity to fully absorb TSEE's annual supply of 4,000 GWh if needed. The credit profiles of TSEE's GRE shareholders are either sovereign-linked or rated in the 'A' category or above.

Incentives to Support
Preservation of Government Policy Role 'Strong'
Offshore wind power is pivotal to Taiwan's renewable energy development and key to its long-term economic stability, but the supply has only been available to large corporations with sufficient long-term demand and strong credit profiles. TSEE is a high-profile policy vehicle established to fill a gap in offshore wind power market by aggregating demand from smaller corporate customers so that they can secure long-term supply of offshore wind power while power producers face lower counterparty risk. Fitch believes a failure by TSEE would have political repercussions for the government.

Contagion Risk 'Not Strong Enough'
Should the government fail to extend support to TSEE in an event of default, the government's reputation would suffer and the financing of GREs in Taiwan, including TSEE's shareholders, could be adversely affected. However, we believe the impact will be manageable because the company was established only in 2024 and is still developing.

Standalone Credit Profile
We assess TSEE's Standalone Credit Profile (SCP) at 'bbb' which is derived from a 'Low Midrange' risk profile and 'aa' financial profile. We position SCP at the middle of the 'bbb' category after comparison with peers.

Risk Profile: 'Low midrange'
We assess TSEE's revenue risk as 'Weaker' and expenditure risk and liabilities and liquidity risk as 'Midrange':

Revenue Risk: 'Weaker'
TSEE sells power under contracts with take-or-pay provisions. Counterparty risk is mitigated by sufficient credit assurance provided by buyers. The shareholders' ability to absorb TSEE's electricity supply mitigates potential contract renewal risk arising from duration mismatches. However, the pre-defined margin under the sale contracts limits TSEE's ability to raise prices should costs increase, leading to 'Weaker' pricing characteristics, which carry higher weight in the revenue risk assessment.

Expenditure Risk: 'Midrange'
TSEE has clear cost planning, with the cost of goods sold as its major cost driver. TSEE also plans to pass through most of the execution and volume risk to buyers. The risk of revenue falling short of operating expenditure due to lower power supply and project delays is mitigated by the company's strong capital base, underpinning the 'Midrange' expenditure risk assessment.

Liabilities and Liquidity Risk: 'Midrange'
Our assessment is driven by 'Midrange' debt and liquidity characteristics. The company has a limited record of debt financing because it is new and has a strong capital base. We expect market access to be available to the company if needed due to its profile and government linkage. The assessment also reflects the shareholders' commitment to assume defaulted contracts, which supports TSEE's liquidity.

Financial Profile 'aa'
Fitch expects the company to remain in a net cash position due to its strong capital base, positive EBITDA generation and well-managed cash conversion cycle under the rating case. The financial profile assessment is constrained by TSEE's modest profitability while it is still developing, which could lower the debt service coverage and interest coverage ratios if the company raises debt for short-term working capital needs.

Short-Term Ratings
The Short-Term IDR of 'F1' is driven by the 'A' Long-Term IDR and supported by its 'Midrange' liabilities and liquidity risk and net cash position.

National Ratings
TSEE's National Long-Term Rating of 'AA+(twn)' reflects its low default risk relative to domestic peers in Taiwan. The National Short-Term Rating of 'F1+(twn)' corresponds to the National Long-Term Rating.

PEER ANALYSIS
We view public sector GREs in Taiwan, such as Taiwan Power Company (AA/AAA(twn)/Stable), Taiwan High Speed Rail Corporation (AA+(twn)/Positive) and China Steel Corporation (AA(twn)/Stable), as comparable peers. The ratings on the peers are above their standalone credit profiles as they benefit from Fitch's expectation of support from the Taiwan government.

Issuer Profile
TSEE is established by the government of Taiwan as intermediate off-taker for offshore wind power projects.

Key Assumptions
Fitch's rating case is a "through-the-cycle" scenario, which incorporates a combination of revenue, cost and financial risk stresses. It is based on 2025-2029 scenario assumptions for the entity:
- TSEE to start generating operating revenue from 2029, with the planned capacity fully matched by demand;
- Operating expenditure to grow at a rate similar to revenue, as the cost of goods sold is the key cost driver;
- Capital expenditure to be nearly none as its business model does not require heavy investment;
- TWD200 million of short-term debt raised from 2029 to replenish working capital.

Rating Sensitivities
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
- Negative rating action on the government of Taiwan could lead to negative rating action on the Long-Term IDRs.
- A weaker assessment of the government's responsibility or incentive to provide support, leading to a support score equal to or below 15 points under our GRE criteria.
- Downward revision of the SCP to 'bb+' or below, which could be driven by deterioration in the risk profile or financial profile.
- Weakening in TSEE's government linkages or positioning relative to domestic peers could lead to negative change in the National Long-Term Rating.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
- Positive rating action on the government of Taiwan could lead to positive rating action on the Long-Term IDRs.
- An improved assessment of the government's responsibility or incentive to provide support, leading to a support score equal to or above 30 points under our GRE criteria.
- Material improvement in the SCP to 'a' or above, which may result from a strengthened risk profile or financial profile.
- Strengthening in TSEE's government linkages or positioning relative domestic to peers could lead to positive change in the National Long-Term Rating.

ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.