Fitch Ratings has affirmed
The Outlook for the IDR is Stable. A full list of rating actions is below.
The affirmation of the IDR reflects REN's low domestic business risk profile as the sole gas and electricity transmission system operator (TSO) and the second-largest gas distributor in
The Stable Outlook assumes regulatory stability and supportive market environment with higher Portuguese sovereign yields. The large share of fixed-rate debt should minimise the negative impact from rising interest rates. Fitch forecasts funds from operations (FFO) net leverage to be below the negative sensitivities for 2022-2025.
Key Rating Drivers
Solid Domestic Business Profile: REN's IDR reflects its solid business profile as the sole Portuguese TSO for electricity transmission and gas transport, regasification and storage and the second-largest gas distributor in the country. Almost all its domestic activities are fully regulated, under a long-standing and predictable regulatory framework, although with shorter regulatory periods (four years) and more volatile cash flows, due to less predictable tariff deviations than peers.
Regulatory Stability: Current regulatory periods run until 2025 for electricity and 2023 for gas. In 2022, the Portuguese regulator introduced a new totex framework for the electricity transmission business, which has been credit neutral for REN. Fitch expects the gas framework review to have a minimal impact on REN's business profile, similar to the most recent review.
Financial Profile Is Within Guidelines: We expect FFO net leverage to remain consistent with the guidelines for the 'BBB' over the forecasting horizon. In 2022, FFO will be negatively affected by higher taxes paid (due to the settlement of deferred taxes), while sizeable inflows (related to tariff deviations) will contribute to a decrease in net debt. Fitch sees net debt stabilising at about
We forecast net debt to (regulatory asset base (RAB) + associates) decrease to 64% by 2025 from 68% in 2020 (negative guideline at 69%). REN maintains its commitment with the investment-grade credit metrics.
Resilient Against Inflation, Interest Rates: The regulatory rate of return (RoR) is indexed to the 10-year Portuguese sovereign bond yield and revised annually, allowing a quick pass-through of changes in the yield environment. The gas transmission framework includes yearly adjustments of allowed opex for inflation, while the electricity transmission framework includes annual adjustments of both allowed opex and D&A (the latter for assets built after January 2022).
The negative impact of rising interest rates will be limited over the coming years given that REN has a large share of fixed-rate debt (72% at end-2021). On the other hand, price increases for specific materials are outpacing inflation leading to capex overruns compared with the previously approved plan.
Elevated Energy Transition Capex: Fitch assumes REN's gross capex for 2022-2025 at about
Electricity capex, about 80% of the total capex, largely focuses on enabling decarbonisation in
REN Trading PPAs Are Cash Flow Beneficial: Until
The Portuguese regulator makes ex-ante assumptions regarding demand and the electricity price. If the price rises above that assumed there is a tariff deviation in favour of the regulated company that manages the PPAs, which will be returned to the system within two years.
Lower Cash Flow Volatility from 2024: We forecast working capital unwinding in 2023-2024 as tariff deviation payables are returned to the system. A new accounting policy has removed the obligation to defer taxes for cash inflows from the PPAs but has required early settlement of existing deferred taxes in 2021, weakening FFO in that year.
Tariff deviations from REN Trading will naturally decrease due to the expiration of the remaining Turbogas PPA in 2024 (Tejo's PPA expired in
Revised Dividend Policy: REN revised its dividend policy for 2021-2024, reducing the dividend floor from
Derivation Summary
REN is the sole TSO for gas and electricity in
Fitch considers REN's business risk profile as broadly aligned with Red Electrica, with lower revenue visibility (due to shorter regulatory periods and higher cash flow volatility) balanced by framework stability across regulatory periods, supported by a truly independent regulator and a better protection from inflation and a higher proportion of regulated earnings.
REN's ratings are one notch lower than Snam's, mainly due to a lower debt capacity and higher leverage, and two notches lower than Red Electrica's, mainly due to leverage.
Key Assumptions
Fitch's Key Assumptions Within the Rating Case for the Issuer
-Downward review of the gas (transmission and distribution) base RoR at the time of the regulatory reset (
10-year Portuguese government bond steadily increasing to 3.36% in 2025 from 2.68% in 2022 (it is currently at about 3.4%);
Borrowing costs fixed at 4.0% for new debt;
RAB slightly increasing to
Tariff deviation stock increasing to
Average capex (net of subsidies and solar promotors receivables) of about
Dividends over the period slightly above the
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade:
Expected FFO net leverage below 6.3x and net debt/(RAB + associates) below 60% on a sustained basis.
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade:
FFO net leverage above 7.0x; expected net debt/(RAB + associates) above 69%, and FFO interest coverage below 3.0x, on a sustained basis.
Negative changes to the regulatory framework beyond our current expectations, or further adverse fiscal measures.
Stated financial policy that is no longer commensurate with our sensitivities for the 'BBB' rating.
A one-notch downgrade of REN's IDR to 'BBB-' would not lead to similar action on the senior unsecured rating as it would benefit from a one-notch uplift from the IDR due to expected above-average recoveries if the Portuguese sovereign rating remains at least 'BBB'.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Strong Liquidity: At
Centralised Debt Structure: The structure is a standard corporate financing model and has no impact on the ratings as the bulk of debt is issued and managed at the holdco and finco, the latter supported by keep-well agreements. All debt is senior unsecured.
Issuer Profile
REN is the sole Portuguese TSO for electricity transmission and gas transport, regasification and storage. Since 2017, it has also owned the second-largest gas distribution concession in
Summary of Financial Adjustments
We reclassify the long-term part of the tariff deviation as working capital.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This 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. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
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