Morningstar DBRS Assigns EDP - Energias de Portugal, S.A. and EDP Finance B.V.’s Issuer Rating of BBB With Stable Trend

DBRS Ratings GmbH (Morningstar DBRS) assigned an Issuer Rating of BBB with Stable trend to EDP - Energias de Portugal, S.A. (EDP or the Group) and EDP Finance B.V. (EDP Finance).

KEY CREDIT RATING CONSIDERATIONS
EDP operates in the energy generation, distribution, and supply markets. The Group holds a monopolistic position in Portugal as the dominant distribution system operator (DSO) and it is one of the main renewable energy groups in the Iberian Peninsula with 80% generation output coming from renewable sources through its 22.8 megawatt (MW) renewable installed capacity, including hydro, wind, and solar generation, at the end of September 2023. The business risk profile benefits from regulated revenues coming from the electricity distribution in Portugal, Spain, and Brazil (33% of total EBITDA at the end of 2022) and from the contracted electricity generation (56% EBITDA), with minimal merchant exposure. The Group is currently executing its ambitious business plan to reinforce its leading position in the energy transition reaching around 33 gigawatts (GW) of renewable installed capacity at the end of 2026 through an investment of around EUR 21 billion.

CREDIT RATING DRIVERS
Although a credit rating upgrade is not likely at this time, Morningstar DBRS could consider an upgrade if the cash-flow-to-debt ratio were to improve to well above 15.0%, debt-to-capital to below 50.0%, and EBITDA-to interest remains well above 4.0 times (x) on a sustained basis. Morningstar DBRS could consider a credit rating downgrade if cash-flow-to-debt ratio deteriorates below 12.0%, debt-to-capital above 65.0%, and EBITDA-to interest remains below 3.0x.

EARNINGS OUTLOOK
During the last 12 months ended September 2023 (LTM), EDP’s revenues reached EUR 17.1 billion mainly driven by higher hydro production in Portugal during the first nine months of 2023 (+61% at Q3 2023 versus Q3 2022 because of the extreme drought in 2022). Recurring EBITDA increased to €5,011 million, thanks to the hydro production and normalisation of electricity and gas sourcing costs during 2023, which partially mitigated the lower wind resources and electricity wholesale prices in Spain and Portugal. The asset rotation strategy developed by the Group contributed EUR 393 million in 2023 with the sale of 300 MW renewable portfolio in Poland and the 257 MW wind portfolio in Spain.

FINANCIAL OUTLOOK
At the end of September 2023, adjusted gross debt amounted to EUR 22.2 billion, of which 26% was raised at EDP, 49% at EDP Finance, and 11% at EDP Brazil, and it is ring-fenced and the remaining 15% at the other subsidiaries level mainly through project finance. The financial leverage is considered moderate with cash flow-to-debt at 14.3% and debt-to-capital at 57.2% at the end of 2022.

CREDIT RATING RATIONALE
EDP and EDP Finance’s Issuer rating are supported by the following key factors: (1) the monopolistic position in the Portuguese electricity distribution market and its position among the leading renewable companies worldwide; (2) high level of diversification in terms of business, technologies, geography, and supportive regulatory frameworks, which partially reduce revenue’s fluctuations; (3) predictable and recurrent cash flow generation thanks to the regulated activities in electricity distribution and to the contracted generation business; (4) well spread maturity calendar and adequate liquidity profile with around EUR 6,115 million of available credit facilities at the end of September 2023 to cover debt maturities; and (5) asset rotation strategy developed by the Group to re-invest in renewable growth; (6) Keep Well Agreement provided by EDP to EDP Finance under the EMTN program which partially mitigates the lack of guarantee from EDP for its finance entity. The Group’s creditworthiness is constrained by its (1) high level of capex expected in the next two years of around EUR 6.2 billion to achieve the business plan; (2) merchant risk for the non-contracted generation; (3) changes in the regulatory frameworks leading a less supportive regulations; and (4) operational risk associated to the business plan execution.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

There were no Environmental/Governance/Social factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024), https://dbrs.morningstar.com/research/427030.

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)

-- Weighting of BRA Factors
In the analysis of EDP - Energias de Portugal S.A. and EDP Finance B.V., the BRA factors are considered in the order of importance contemplated in the methodology.

-- Weighting of FRA Factors
In the analysis of EDP - Energias de Portugal S.A. and EDP Finance B.V., the FRA factors are considered in the order of importance contemplated in the methodology.

-- Weighting of the BRA and the FRA
In the analysis of EDP - Energias de Portugal S.A. and EDP Finance B.V., the BRA carries greater weight than the FRA.

Notes:
All figures are in euros unless otherwise noted.

Morningstar DBRS applied the following principal methodology:
-- Global Methodology for Rating Companies in the Regulated Utility and Independent Power Producer Industries (30 January 2024) https://dbrs.morningstar.com/research/427244

The following methodologies and criteria have also been applied:
-- DBRS Morningstar Global Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (27 September 2023) https://dbrs.morningstar.com/research/421119
-- DBRS Morningstar Global Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (19 October 2023) https://dbrs.morningstar.com/research/422134
-- DBRS Morningstar Global Criteria: Guarantees and Other Forms of Support (28 March 2023) https://dbrs.morningstar.com/research/411694.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyses corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/397223.

The primary sources of information used for this credit rating include audited financial accounts, interim accounts, management information, and external correspondence. Morningstar DBRS considers the information available to it for the purposes of providing this credit rating to be of satisfactory quality.

These credit ratings concern a newly rated issuer. This is the first Morningstar DBRS credit rating on these issuers.

With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, this is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer.

With Rated Entity or Related Third-Party Participation: NO
With Access to Internal Documents: NO
With Access to Management: NO

Morningstar DBRS does not audit the information it receives in connection with the credit rating process, and it does not and cannot independently verify that information in every instance.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS trends and credit ratings are under regular surveillance.

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

The sensitivity analysis of the relevant key credit rating assumptions can be found at: https://dbrs.morningstar.com/research/428141.

This credit rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Laura Gutierrez, Assistant Vice President
Rating Committee Chair: Anke Rindermann, Managing Director
Initial Rating Date: 15 February 2024
Last Rating Date: Not applicable as there is no last rating date

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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