November 24 (SeeNews) - Fitch Ratings said it has assigned Romania-based nuclear power generation company Nuclearelectrica [BSE:SNN] a first-time Long-Term Foreign-Currency Issuer Default Rating (IDR) of 'BBB-' with a negative outlook.
The rating reflects Nuclearelectrica's strong market position as the sole producer of electricity from nuclear power plants in Romania, covering around 20% of the country's electricity demand, a solid operational record and a strong financial profile, Fitch said in a press release on Tuesday.
As a result, Fitch has assessed the company's Standalone Credit Profile (SCP) at 'bbb-'.
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, the agency added.
In a separate statement filed with the Bucharest Stock Exchange on Tuesday, Nuclearelectrica said it has asked for a rating evaluation in order to complete major investment projects.
"[...] SN Nuclearelectrica SA applied for the assessment and assignment of a rating with a view to market positioning and implicitly granting the international community of institutional investors the possibility to objectively assess SNN’s capabilities," Nuclearelectrica said.
Blue-chip Nuclearelectrica's shares traded 0.12% higher at 42.25 lei by 1109 CET on Wednesday on the BVB.
Fitch also said in the statement:
"Key Rating Drivers
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 1.4GW, has a strong operational record, high operating margins and a solid position in the Romanian merit order, ahead of thermal generation.
Licence to be Renewed: Nuclearelectrica operates two units under licences, which are valid till 2023 for unit 1 and till 2030 for unit 2. The licences are renewed every 10 years on the basis of nuclear safety assessments. We assume the licence for unit 1 to be renewed in 2023.
Low Leverage: We expect Nuclearelectrica to maintain a strong financial profile in 2021-2024 with funds from operations (FFO) net leverage below 1x and FFO interest coverage to be strong, due to a low debt burden. This is based on our expectations of average annual consolidated capex of about EUR200 million over the same period and a 100% dividend payout ratio from 2022, above the company's expectations.
Credit Metrics to Weaken: We expect credit metrics to deteriorate following the expected shutdown of unit 1 reactor for refurbishment from December 2026 till September 2029. This will lower EBITDA as unit 1 is responsible for slightly below half of the company's electricity generation volumes. The refurbishment will also significantly increase capex. After rehabilitation the company expects to operate unit 1 for another 25 years.
Negative Free Cash Flow Expected: We expect the company to continue to generate healthy cash flows from operations, but its free cash flow (FCF) will turn negative in our rating-case projections for 2022-2025, due to capex and our assumption of 100% dividend payout. The capex of about EUR1 billion over 2021-2025 includes investments related to the refurbishment of unit 1, heavy water detritation installation construction and preparatory works related to the construction of units 3 and 4. We expect capex to be partially debt-funded.
Foreign-Exchange Risks: Nuclearelectrica is exposed to foreign-exchange (FX) fluctuations as all of its debt at end-2020 was denominated in foreign currencies (euros and Canadian dollars). This is in contrast to its local currency denominated revenue, although electricity prices are set in euros, but are paid in Romanian leu, which mitigates FX risk. The company does not use FX hedging.
New Windfall Tax Impact Limited: The Romanian government has recently introduced a windfall tax of 80% on electricity producers, with the exception for power plants that run on fossil fuels, on revenues from prices higher than EUR91 per MWh (around RON450 per MWh). This measure will apply till end-March 2022. We expect this to have limited impact on Nuclearelectrica's financial profile at present as our current electricity price assumptions are below this level.
Strong Links with State: We view the status, ownership and control under the GRE Rating Criteria as 'Strong', reflecting majority state ownership (82.49%), and the company's strategic importance as the sole producer of nuclear energy in Romania with a large share of covered electricity demand (around 20%).
State-Guaranteed Debt Share to Fall: We view support track record as 'Strong' on the back of state guarantees for all the outstanding debt at end-2020, although we expect the share of state-guaranteed debt to gradually decline as existing state-guaranteed debt matures in 2021-2024 and the company plans to raise new debt from major international lenders without state guarantees. We estimate that the share of state-guaranteed debt will decline to below 75% by end-2022 and further by 2024.
Moderate Incentive to Support: We assess the socio-political implications of a default by Nuclearelectrica as 'Moderate' as we assume that most of its operations would likely continue following a default. We also assess the financial implications of a default as 'Moderate' as we believe that non-payment of debt would have a moderate impact on funding access for the government and other GREs.
Strong PSL Linkage: We view the parent-and-subsidiary linkage between the state and Nuclearelectrica as strong under our ED PSL Criteria, with the subsidiary being stronger than the parent. Therefore, Nuclearelectrica's rating would be constrained by the sovereign IDR if the latter is downgraded. This is reflected in the Negative Outlook for Nuclearelectrica, mirroring that on the sovereign rating. Our overall assessment of legal ring-fencing and access and control factors is 'open', due to majority state-ownership leading to effective control and open ring-fencing.
Derivation Summary
Nuclearelectrica's Romanian peers are Electrica S.A. (BBB/Negative), which is an electricity distribution company in three regions of Romania and SNTGN Transgaz SA (BBB-/Stable), which is a gas transmission and transit company. Electrica and Transgaz share the same regulatory environment, but the latter has a large gas transit business (which is higher-risk than transmission and distribution) and higher leverage. Therefore, Electrica's rating is one notch above Transgaz's rating.
Electrica's SCP of 'bbb' is supported by a resilient business profile, which is dominated by regulated electricity distribution, and by low leverage. Electrica's IDR is above the Romanian sovereign rating, due to the company's weak links with the state. However, some linkage through the Romanian state's large shareholding of Electrica (48.8% by capital, 49.8% by voting rights) caps its rating at one notch above that of the Romanian state. Consequently, the Outlook on Electrica's IDR is Negative since a downgrade of Romania would result in a downgrade of Electrica's one-notch-higher 'BBB' IDR.
In the case of Transgaz, neither the GRE nor the PSL linkage constrains its rating given its SCP of 'bbb-', but some linkage exists through the Romanian state's control in Transgaz. We therefore cap Transgaz's rating at one notch above that of the Romanian state.
In contrast we assess Nuclearelectrica's links with the state as strong under the GRE and ED PSL Criteria. This results in a higher GRE score for Nuclearelectrica (20 points) than in the case of Transgaz and Electrica (10 and five points, respectively). Considering its strong links with its parent under our ED PSL Criteria, the rating Outlook of Nuclearelectrica mirrors that of the sovereign rating.
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer
- Domestic GDP growth of about 4.3%-7.2% and inflation of about 3%-4.1% over 2021-2024
- RON/EUR exchange rate at 4.9-5.7 in 2021-2024
- Low single-digit electricity price increases in 2022-2023, followed by a decrease in 2024
- Capex on average at about EUR200 million annually in 2021-2024
- Dividends at about 100% of net income in 2022-2024
- Participation in the construction of units 3 and 4 limited to EUR200 million
- Unit 1 licence extension in 2023
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
- Due to the Negative Outlook, an upgrade of Nuclearelectrica's rating is unlikely. However, a revision of the Outlook on the Romanian sovereign rating to Stable would result in a similar rating action on Nuclearelectrica
Factors that could, individually or collectively, lead to negative rating action/downgrade:
- Negative rating action on Romania
- FFO net leverage above 2x for a sustained period may be negative for the SCP
Rating sensitivities for Romania, listed in the rating action commentary dated 22 October 2021:
Factors that could, individually or collectively, lead to negative rating action/downgrade:
- Fiscal: Deterioration in policy credibility that leads for example, to faster-than-projected increase in public debt, reduces financing flexibility or increases risks to macro-economic stability
- External: A sustained deterioration in the balance of payments, for example, reflecting a sharper widening in the current account deficit and/or failure to attract non-debt financing flows
Factors that could, individually or collectively, lead to positive rating action/upgrade:
- Fiscal: Improved confidence that the government´s fiscal strategy will lead to a narrowing fiscal deficit and broad stabilisation of general government debt/GDP over the medium term
- External: A reduction in external vulnerabilities, for example, via a sustained improvement in external debt ratios
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 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance.
Liquidity and Debt Structure
Strong Liquidity: At end-June 2021, Nuclearelectrica's cash and cash equivalents of RON728 million, together with short-term deposits of up to 12 months of RON1,232 million, were sufficient to cover short-term maturities of RON219 million.
Issuer Profile
Nuclearelectrica is the sole producer of electricity based on nuclear technology in Romania, covering around 20% of the country's total demand for electricity and 35% of electricity produced without greenhouse gas emissions. The company has two operating nuclear reactors (Cernavoda Units 1 and 2) with an installed capacity 706.5 MW each.
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.
Public Ratings with Credit Linkage to other ratings
Nuclearelectrica's Negative rating Outlook mirrors that of the sovereign as its rating would be constrained by the sovereign rating of Romania, if the latter is downgraded."
(1 euro =4.9487 Romanian lei)
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