DBRS Ratings GmbH (DBRS Morningstar) confirmed the Issuer Rating and the Euro Medium Term Notes rating of Madrileña Red de Gas Finance B.V. (MRG Finance or the Issuer) at BBB (low) with Stable trends. MRG Finance is the financing entity for Madrileña Red de Gas, S.A.U. (MRG or the Guarantor), and all current debt issued by MRG Finance is guaranteed by MRG. As such, the ratings on the Issuer are based on the credit quality of the Guarantor.
KEY RATING CONSIDERATIONS
The rating confirmation is supported by MRG´s (1) stable regulated business and (2) reasonable franchise area. MRG is a regulated natural gas distributor operating in Madrid. DBRS Morningstar considers MRG’s regulatory framework to be reasonable for the BBB rating range as it provides a very steady stream of earnings and cash flow. Almost all of MRG’s operations are regulated (98% of 2020 revenues). The current regulatory period is the six years from 2021 to 2026, and it is largely a continuation of the previous framework where the base remuneration was adjusted based on the annual changes in the volume of natural gas distributed and the number of connection points. The regulatory framework provides remuneration based on activity rather than assets, incentivizing to optimize operating and capital expenditures. DBRS Morningstar notes that MRG's capex requirements are not material (maintenance capex of around EUR 1.0 million to EUR 2.0 million annually) and that most of the expansionary capex is discretionary.
MRG's key credit metrics have been weak for the BBB rating range. MRG’s cash flow-to-debt metric has averaged around 9.0% to 10.0% for the past few years. MRG's debt-to-capital ratio has also been high, reaching 81.5% in 2020. These two weaker metrics are partly offset by the stronger EBIT-interest coverage ratio (3.63 times in 2020) and the stability of the business risk assessment. Although DBRS Morningstar expects the cash flow-to-debt and debt-to-capital ratios to weaken over the next regulatory period, the ratios are currently supportive of the BBB (low) rating.
Based on the final framework for the 2021–26 regulatory period, the Comisión Nacional de los Mercados y la Competencia (CNMC), has established a final haircut of EUR 24.5 million to be phased in over the six-year period. While this amount is lower than the preliminary haircut estimate of EUR 34.1 million, earnings and cash flows will both decrease over the medium term and pressure the already weaker key credit metrics. A negative rating action is possible if MRG is unable to manage the remuneration haircut, resulting in the cash flow-to-debt ratio falling below 9.0% for an extended time frame. DBRS Morningstar also notes that because the remuneration haircut will be phased in gradually, the metrics may become increasingly more difficult to maintain over the medium term. However MRG has a flexible dividend policy and has indicated its commitment to reduce or cease dividends in order to prioritize capital expenditure and leverage reduction.
If MRG is able to demonstrate that it can prudently manage its dividends and debt load and maintain its key credit metrics in the BBB rating range (specifically, the cash flow-to-debt ratio above 10.0%) on a sustained basis, then a positive rating action may occur.
DBRS Morningstar has assumed that, over the six-year period, earnings will decrease by up to EUR 24.5 million with a corresponding decrease in cash flow. Under this scenario, while both the cash flow-to-debt and debt-to-capital metrics will weaken, they will remain supportive of the BBB (low) rating, given the stable business risk assessment. DBRS Morningstar expects MRG to be prudent in its dividend and debt management in order to maintain key credit metrics at current levels and supportive of the BBB (low) rating.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.
All figures are in euros unless otherwise noted.
The principal methodology is Rating Companies in the Regulated Electric, Natural Gas, and Water Utilities Industry (27 October 2020, https://www.dbrsmorningstar.com/research/368939) which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include DBRS Morningstar Criteria: Guarantees and Other Forms of Support (31 May 2021, https://www.dbrsmorningstar.com/research/379424) and DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (3 February 2021, https://www.dbrsmorningstar.com/research/373262).
For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.
The primary sources of information used for this rating include audited annual accounts for MRG and MRG Finance, the Base Prospectus and Final Terms for MRG Finance’s debt issuances, MRG’s business and financial projections, regulatory documents for MRG, meetings with management, and all written correspondence as of today. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.
DBRS Morningstar does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.
Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.
For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.
The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/382592.
This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.
Lead Analyst: Cristina Ruiz-Jarabo, Assistant Vice President
Rating Committee Chair: Andrew Lin, Managing Director
Initial Rating Date: 17 August 2020
Last Rating Date: 17 August 2020
DBRS Ratings GmbH, Sucursal en España
Paseo de la Castellana 81
Plantas 26 & 2728046 Madrid
Tel. +34 (91) 903 6500
Rating Companies in the Regulated Electric, Natural Gas, and Water Utilities Industry https://www.dbrsmorningstar.com/research/368939 (27 October 2020)
DBRS Morningstar Criteria: Guarantees and Other Forms of Support https://www.dbrsmorningstar.com/research/379424 (31 May 2021)
DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings https://www.dbrsmorningstar.com/research/373262 (3 February 2021)
Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com.