Investing.com -- Fitch Ratings has revised the outlook for Societatea Energetica Electrica S.A., also known as Electrica, from Negative to Stable while affirming the Long-Term Issuer Default Rating (IDR) at ’BBB-’. The revision follows improvements in Electrica’s funding structure, with a larger proportion of long-term funding compared to recent years when short-term financing was more common.

The stable outlook also reflects Fitch’s expectations that Electrica’s leverage metrics will remain within their rating sensitivities from 2025 to 2029. This is supported by consistent EBITDA generation and working capital inflows, mainly from subsidy collections for the supply scheme.

Electrica’s IDR reflects its ’bbb-’ Standalone Credit Profile (SCP), which is supported by its business profile. Approximately 80% of EBITDA comes from regulated and predictable electricity distribution, and the company’s financial profile is consistent with the rating.

Electrica has reduced its short-term debt to about 60% of total debt at the end of 2024, down from 80% at the end of 2023. This is expected to decrease further, as Electrica secured a new €200 million long-term loan from the European Investment Bank (EIB) for capital expenditure on distribution. Electrica also plans to sign a RON3.1 billion syndicated facility in April, which will include RON1.3 billion long-term facilities. After the refinancing, the short-term debt share is expected to reduce to about 50%.

Electrica generated about RON1.3 billion of EBITDA in 2024, supported by solid results in the distribution segment. However, this was partially offset by negative EBITDA in the supply segment due to imbalances in electricity supply, regulatory changes affecting balancing cost recovery, and volatility in the balancing market.

Fitch forecasts a slight improvement in EBITDA in 2025 to about RON1.5 billion, supported by the normalisation of supply EBITDA. From 2027, EBITDA is expected to benefit significantly from contributions from the generation segment, amounting to around RON180 million per year.

Fitch anticipates average funds from operations (FFO) net leverage to remain within their rating sensitivities of 3x to 4x from 2025 to 2029, supported by stable EBITDA and FFO generation. They project a total working capital inflow of RON1.8 billion in 2025-2026, primarily consisting of government compensation payments for the supply scheme.

Electrica entered into the fifth regulatory period in 2024, which remains broadly consistent with previous regulation. The return on the regulated asset base increased to 6.94% from 6.39%, offsetting lower incentives on certain investments. Electrica is planning to invest around RON1.6 billion in renewables between 2025-2029 to boost its energy production and contribute towards Romania’s net zero emissions target.

At the end of 2024, the majority of financial indebtedness was at Electrica’s operating distribution and supply subsidiaries (DEER S.A and Electrica Furnizare S.A.). Priority debt at these subsidiaries accounts for about 3.2x 2024 EBITDA, implying a material possibility of subordination of the debt at the Electrica level that is not guaranteed by these subsidiaries.

The revision of the Outlook to Stable makes Electrica’s Long-Term IDR higher than that of Romania (BBB-/Negative). The company can be rated up to two notches above the Romanian state due to ’porous’ legal ringfencing and access and control. If Electrica’s SCP became weaker than Romania’s rating, Fitch would expect it not to benefit from parental support, reflecting the ’low’ level of legal, strategic and operational incentives.

Factors that could lead to a negative rating action or downgrade include a deterioration in the business and market environment, a higher-than-expected impact on cash flow generation from political/regulatory interventions, FFO net leverage above 4.0x on a sustained basis, or a multiple-notch downgrade of the Romanian sovereign rating. Factors that could lead to a positive rating action or upgrade include FFO net leverage below 3.0x on a sustained basis, together with FFO interest coverage above 4.0x on a sustained basis, and further improvement in funding structure and liquidity.

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