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BUCHAREST (Romania), October 10 (SeeNews) - Fitch Ratings has affirmed Romanian electricity transmission system operator Transelectrica [BSE:TEL] long-term issuer default rating at 'BBB' with a stable outlook.
The action reflects Transelectrica's conservative balance sheet and earnings supported by Romania's regulated asset base (RAB) regulation for electricity transmission, with the third regulatory framework running until mid-2019, Fitch said in a press release late on Tuesday.
"The current regulatory environment stimulates investments in the network, with more than 3 billion lei ($737 million/ 643 million euro) of investments planned by 2023, which we expect will result in increased leverage. The rating reflects Transelectrica's standalone credit profile (SCP), but we view any upside as limited by the links to Romania (BBB-/Stable), its 58.7% shareholder," Fitch added.
In June 2017, Fitch Ratings assigned Transelectrica a first-time long-term issuer default rating of 'BBB' with a stable outlook.
Transelectrica shares traded 0.21% higher at 23.85 lei as at 1004 CET on Wednesday on the Bucharest Stock Exchange
Fitch also said in the press release:
"KEY RATING DRIVERS
- SCP Supports the Rating: Fitch evaluates Translectrica's links with the Romanian state under the criteria for Government-Related Entities (GRE). We view its status, ownership and control as strong and support as weak, while we assess socio-political implications and financial implication of a potential default of the GRE as moderate and weak, respectively.
Transelectrica's SCP supports its rating being one notch above the sovereign rating, reflecting our assessment of their legal and operational links as weak under the Parent and Subsidiary Rating Linkage criteria. Weak Legal and Operational Links: The transmission network is a strategic asset for Romania, but Translectrica operates independently from the government with the members of the Supervisory Board selected by an independent HR company through a transparent process. The legacy loans guaranteed by the government, which represented 12.5% of total debt at end-2017, are due to mature by 2020.
Fitch expects Translectrica to continue to finance its operations independently without cross-defaults provisions with the government. The transmission services in Romania are regulated by Autoritatea Nationala de Reglementare in Domeniul Energiei (ANRE) by applying a transparent methodology to tariff calculations without direct government interference. Translectrica's future dividend payments will continue to be influenced by the government as a majority shareholder, but we assume that its capex funding needs and covenants in existing loan documentation will continue to be prioritised. Capex to Drive Leverage: We consider the credit metrics as strong for the rating, despite an ambitious capex programme totalling over RON3 billion by 2023 and our assumption for steady dividends, which may drive Translectrica leverage ratios to around 3.5x, up from 0.5x in 2017.
Earnings Volatility: Transelectrica's earnings are more volatile than peers, as tariffs are set based on estimated parameters after which adjustments are made with one or two years delay for volumes and non-controllable costs pass-through. The swings may go either way: this regulatory period started with higher allowances in 2014 which have been reversing towards the end of the price control in June 2019. It is possible that the next price control may address this issue and look to further eliminate the discrepancy between the cost base and the tariff calculation. Some volatility also occurs due to zero profit activities on the balancing market and other pass-through items.
Fourth Regulatory Period: The next regulatory period is expected to start in July 2019. There have been no formal communications on the key parameters for the next review, but Fitch assumes that the main regulatory and remuneration mechanisms will remain broadly unchanged. However, in our forecast we conservatively assume a lower allowed return of 5.6%, in line with data recently published by ANRE for the calculation of the allowed WACC for electricity distribution. The potential lower allowed WACC could be balanced by the proposed introduction of a capacity based transmission fee which should stabilise revenues by reducing the exposure to energy volumes.
DERIVATION SUMMARY - Transelectrica is the regulated transmission operator in Romania. The company benefits from RAB-based regulation, comparable with other European frameworks, but the return is set at 7.7% pre-tax real, a level much higher than in other countries. Exposure to significant ex post adjustments creates cash flow volatility. Transelectrica's close peer is Redes Energeticas Nacionais, SGPS, S.A.'s (REN; BBB/Stable), the transmission system operator for gas and electricity in Portugal and the largest gas distributor. We consider REN to be better diversified and to have better cash flow visibility than Transelectrica, but it has significantly higher leverage.
KEY ASSUMPTIONS - Fitch's Key Assumptions Within Our Rating Case for the Issuer - - 3% negative transmission volume deviation, the maximum shortfall which will not be reimbursed - - 5% controllable operation and maintenance overspend - - No efficiencies achieved in grid losses (2% p.a. target) - - Stable dividends at RON166 million per year - - New debt interest of 3.5% RATING SENSITIVITIES - Developments that May, Individually or Collectively, Lead to Positive Rating Action - -Fitch views Transelectrica's rating as capped at 'BBB', one notch above the Romanian state (BBB-/Stable) due to its links with the state. We assess Transelectrica's standalone profile to be commensurate with a 'BBB' rating. Therefore, positive rating action could occur if Transelectrica's standalone credit profile improves and the Romanian sovereign is upgraded.
Developments that May, Individually or Collectively, Lead to Negative Rating Action -
- Stronger links with the government, or a downgrade of the Romanian sovereign rating -
- A material change in the existing debtholder protective measures currently in place with a more aggressive capital structure, for example FFO adjusted net leverage above 5.0x, fixed charge cover below 3.5x and net debt/RAB above 70% -
- Material changes in the regulatory framework which may adversely impact Transelectrica's profitability
RATING SENSITIVITIES FOR ROMANIA - The main factors that could, individually or collectively, lead to positive rating action are: -
-Reduced risks of macroeconomic instability -
-Implementation of fiscal consolidation that improves the long-term trajectory of public debt/GDP -
-Sustained improvement in external finances The main factors that could, individually or collectively, trigger negative rating action are: - -Persistent high fiscal deficits leading to a rapid increase in government debt/GDP -
-An overheating of the economy or hard landing that undermines macroeconomic stability LIQUIDITY - Adequate Liquidity: At the end of 1H18, Transelectrica had RON546 million of cash and cash equivalents from which RON41 million was restricted for connections fees and for high efficiency cogeneration deposits. 2018 outstanding maturities were around RON219 million including the RON200 million bond maturing in December 2018. Tranelectrica also has available RCF of RON100 million, renewable on a yearly basis."
(1 euro=4.6668 lei)