REDEIA CORPORACION S.A.
Fitch Ratings has affirmed
The Outlook is Stable. Fitch has also affirmed Redeia's senior unsecured rating at 'BBB+' and Red Electrica Financiaciones S.A.U' senior unsecured rating at 'A-'.
The 'A-' IDR reflects Redeia's low business risk as the natural monopoly electricity transmission owner and operator in
The Stable Outlook reflects our expectation of a stable regulatory framework in
Key Rating Drivers
Leverage Spike from 2024: We expect Redeia's FFO net leverage to increase to 5.5x on average for 2024-25, leaving no headroom under current rating sensitivities. This is up from 4.7x on average for 2022-2023. We view management's strong public commitment to keep net debt/EBITDA below '5.0x' by 2025 - consistent with the 'A-' sensitivities - as key for the rating.
Reintel's Divestment Strengthens Balance Sheet: Redeia in
Inflation Adds Pressure: Sustained high inflation could add pressure to Redeia's cash flow as the regulatory framework only provides a partial protection. Full inflation pass-through is only recognised in investments for unique projects (such as interconnections), which represent around 40% of Redeia's plan, while the balance is only half-protected from inflation. Furthermore, the operation and maintenance (O&M) costs are set at beginning of the regulatory period with no interim reviews. So far, inflation risk has been largely contained by Redeia's mid-term procurement policy and efficiency efforts.
Challenging Interest Rate Environment: Redeia's funding cost is expected to increase as new debt, and particularly hybrids, are raised to finance its large capex plan in a scenario of rising interest rates. This contrasts with the allowed return, which is based on fixed nominal weighted average cost of capital of 5.58% during the whole regulatory period (until 2025). Although we expect some impact on FFO, we forecast Redeia will maintain strong coverage ratios until 2025 due to its solid financial profile, strong liquidity (boosted by the Reintel sale) and low fixed-rate outstanding debt.
Transmission Network Plan Approved: The 2021-26 network development plan, approved by the regulator in
Capex Increasing: Redeia aims to invest UR3.4 billion of capex in regulated activities in
Domestic Revenue Decline from 2024: The end of the regulatory life of Redeia's pre-1998 assets (about 40% of its total gross regulated asset base in
Higher Returns After 2025: We expect Redeia's work-in-progress to total about
Non-Regulated Income to Peak: We expect the contribution of Redeia's telecoms business to rise to about 20% of EBITDA by end-2025 from 15% at end-2021. However, we expect this trend to reverse while grid investments gradually enter into operation and contribute to EBITDA. Regulated earnings from capex will restore the unregulated portion of EBITDA to below 20%, although this is still well above the level at European peers.
Stable EBITDA for 2022: 1H22 EBITDA has increased 1.7% year-on-year. Domestic transmission EBITDA declined by about 2% due to the roll-out of a specific O&M plan for critical assets. However, this has been compensated by positive trading in the international transmission (61% increase) and telecom business (up 4.5%), which benefitted from higher turnover and favourable exchange rates. Fitch forecasts Redeia's 2022 EBITDA similar to 2021 levels.
Derivation Summary
Red Electrica's has a robust business profile with limited price and volume risk similar to other system operators such as
Key Assumptions
Transmission revenue for the 2021- 2025 is calculated based on the application of the methodology contained in the circular 5/2019 and 7/2019 approved by CNMC on
Allowed rate of return of 5.58% from 2021 onwards (from 6.0% in 2020).
Revenue for the system operator activity of
Fibre-optic and technology services revenue to average
International revenue to average around
Revenue from satellite subsidiary
Dividends from international investments to average
Total capex at about
Dividends in line with announced policy of
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
A positive rating action may arise from FFO net leverage remaining consistently below 4.5x or FFO interest coverage increasing to about 5.0x or above, both on a sustained basis.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
An increase in FFO net leverage to above 5.5x and FFO interest coverage of about 4.0x or below, both on a sustained basis, as a consequence of adverse regulatory changes, higher capex or failure to implement sufficient mitigation measures, at or beyond those included in the 2021-2025 business plan.
A growing share of non-regulated EBITDA above 20% could lead to a revision of leverage guidelines for the rating. This would be due to our view of a changing business profile towards riskier activities.
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
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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