Fitch Ratings said that it has reaffirmed the Long- Term Foreign-Currency Issuer Default Rating (IDR) of Romanian electricity producer Nuclearelectrica at BBB- with a negative outlook.
The statement from the agency said that the rating reflects Nuclearelectrica’s strong market position as the sole producer of electricity from low-cost nuclear power plants in Romania and its solid position in the merit order.
As a result, Fitch has affirmed the company’s Standalone Credit Profile (SCP) at bbb-. However, Nuclearelectrica’s increases in CAPEX may undermine the financial profile at the current rating level from 2027, which is currently beyond our rating horizon.
Nuclearelectrica’s negative outlook mirrors that of the sovereign as its rating would be constrained by the sovereign rating of Romania (BBB-/Negative), if the latter is downgraded.
Solid Business Profile: The business profile of Nuclearelectrica is supported by its strong market position as the sole producer of electricity based on nuclear technology, covering around 20 % of the country’s total demand for electricity and 35 % of electricity produced without greenhouse gas emissions. The company operates two nuclear reactors with a total installed capacity of about 1.4 GW, has a strong operational record, high operating margins and a solid position in the Romanian merit order, ahead of thermal generation.
Limited Revenue Visibility: Following the completion of the liberalization of the energy market in Romania in 2021 Nuclearelectrica sells its entire generated volume on the competitive market. Bilateral short-term contracts account for around 80 % of sales and are supplemented with spot market trades. High electricity prices support Nuclearelectrica’s revenue stream, but merchant contracts can be viewed as a rating constraint as they expose the company to price risk and introduce volatility and unpredictability to cash flow.
High Electricity Prices: An increase in the average sale price in bilateral contracts and at spot market is the primary driver of above-average EBITDA expectations in 2022. Under our rating case, we assume EBITDA to peak in 2022 at around RON2.7 billion and to trend lower to about 345 million euros in 2024 as market dynamics normalize and sold electricity volumes gradually decrease. Fitch expects a substantial drop in EBITDA from 2027 due to the complete shutdown of unit 1 for planned refurbishment that will take about three years.
Cost Pressures: Fitch expects windfall tax, inflation and decreasing volumes of sold electricity to squeeze EBITDA margins for Nuclearelectrica in the forecast period to on average 30 % in 2022- 2027 from on average 53 % in 2019-2021. Cost pressure arises mainly from higher prices of electricity purchased to fulfill contracts during planned and unplanned outages, and increasing personnel, maintenance, and third-party services expenses. The agency expects a gradual reduction of cost pressure after 2023, driven by the normalization of energy prices and stabilization of services and labor costs.
Windfall Tax Extended: The Romanian Government extended the duration of imposed windfall tax until September 2023 and raised the tax rate to 100 % on revenue from 80 % on prices higher than 91 euros/MWh. This measure effectively limits Nuclearelectrica’s income to the level resulting from the introduced price cap. In the rating case, Fitch conservatively assumes prices to be at the maximum level of 81 euros/ MWh over the forecast period.
Large Investment Plan: Updated Fitch projections incorporate higher investments on average at 300 million euros annually in 2022-2026 compared with 200 million euros annually in 2021-2024, mainly related to the expected refurbishment of unit 1 and heavy water installation projects. The agency also assumes capital involvement in the construction of nuclear units 3 and 4 and the joint venture project of small modular nuclear reactors totaling up to 800 million euros over 2022-2026.