Last September, Fitch Ratings assigned Electrica a first time BBB rating with a stable outlook. Fitch Ratings announced that it has revised the outlook of Romanian electricity supplier and distributor Electrica’s long-term issuer default rating (IDR) to negative from stable and reaffirmed the rating at BBB. The statement from the ratings agency said that the revision of the outlook mirrors the recent revision of the outlook on Romania’s rating to negative from stable, largely driven by the implications of the coronavirus pandemic.
Electrica’s rating continues to reflect its standalone credit profile of bbb, supported by its resilient business profile with 80 %-85 % of EBITDA coming from regulated and fairly predictable electricity distribution, and a strong financial profile.
Electrica’s rating is at the company’s SCP of bbb and above the Romanian sovereign rating due to the company’s weak links with the state assessed under Fitch’s Government-Related Entities (GRE) and Parent and Subsidiary Linkage (PSL) Rating Criteria. Nevertheless, some linkage exists through the Romanian state’s large shareholding of Electrica (48.8 % by capital, 49.8 % by voting rights), therefore it capped Electrica’s rating at one notch above that of the Romanian state. This corresponds with Electrica’s BBB Long-Term IDR.
Electrica’s status, ownership and control links with the Romanian state are strong given that the Romanian state is Electrica’s main shareholder. However, the support track record and expectations are weak, as the company has not received any tangible support in the past nor Fitch expects it to receive it. Also, both the socio-political and financial implications of Electrica’s default are weak.
Default should not lead to a disruption in delivery of the company’s services, in particular distribution, but also supply, as they are strategic for the economy and society. Such a default would also not impact the Romanian sovereign’s funding ability as Electrica operates independently from the state, is one of several distribution companies and its existing and expected debt exposure is relatively small.
Electrica’s main area of operations is electricity distribution (85 % of EBITDA in 2019), conducted via three regional subsidiaries. The three subsidiaries operate electricity distribution networks under long-term concessions granted in 2005 and expiring in 2054. Distribution services are regulated by ANRE, by applying a regulatory asset-based methodology to tariff calculations without direct Government interference. Regulated revenues are approved for five years and the current fourth regulatory period started in 2019 and will last until 2023.
Electrica’s second area of operations is electricity and gas supply (19 % of EBITDA in 2019), conducted via its subsidiary Electrica Furnizare. It comprises two sub-segments: the regulated one (in which the company acts as a supplier of last resort) and the competitive one in which it competes freely with other suppliers throughout the whole country. The supply business is more volatile, competitive and prone to market shocks than distribution.
