Morningstar DBRS Confirms the Issuer Rating and the Euro Medium Term Notes Rating on Madrileña Red de Gas Finance B.V. at BBB (low), Places all Ratings Under Review with Positive Implications

DBRS Ratings GmbH (Morningstar DBRS) confirmed the Issuer Rating and the rating on the Euro Medium Term Notes (EMTN) of Madrileña Red de Gas Finance B.V. (MRG Finance or the Issuer) at BBB (low) and placed all ratings Under Review with Positive Implications.

KEY CREDIT RATING CONSIDERATIONS
MRG Finance is the financing entity of Madrileña Red de Gas, S.A.U. (MRG or the Guarantor) and all current debt issued by MRG Finance is fully guaranteed by MRG. As such, the ratings on the Issuer are based on the Guarantor's credit quality.

The rating confirmations are driven by the solid financial performance of MRG during 2023, with revenues and EBITDA at EUR 143 million and EUR 114 million, respectively, in line with Morningstar DBRS' expectations. In addition, the predictable and recurring EBITDA and cash flow generation, with a cash flow conversion ratio at 88% on average, contributed to the ratings confirmation.

The Under Review with Positive Implications status reflects the Issuer's intention to remain fully compliant with the applicable regulatory requirements, having published a Consent Solicitation Memorandum requesting the Noteholders' agreement to replace the existing guarantor of the EMTN with Elisandra V, which is the parent and sole shareholder of MRG. The Consent also includes certain other changes to the terms and conditions of the Notes that are credit neutral and comply with the pari passu condition. In addition to the publication of the Consent, the Issuer is also working on the refinancing of the EUR 225 million Sustainability Linked Term Facilities Agreement at MRG to change the borrower to Elisandra V., among other changes.

Morningstar DBRS will closely monitor the proposed transaction to resolve the Under Review with Positive Implications status.

CREDIT RATING DRIVERS
Morningstar DBRS will resolve the Under Review with Positive Implications status and upgrade the ratings if the Issuer fully resolves the current requirement of the resolution of the Comisión Nacional del Mercado de la Competencia (CNMC or the regulator) through the completion of the change in guarantor proposed in the published Consent Solicitation Memorandum, taking into account the following: (1) the proposed bank loan at Elisandra V ranks pari passu with the intercompany loans between Elisandra V and MRG Finance and (2) there is no significant debt issued at MRG or Elisandra V which could lead to significant structural subordination and affect the financial key metrics. The resolution of the Under Review with Positive Implications status and ratings upgrade would also be driven by Morningstar DBRS' expectation that MRG will be prudent in its dividend and debt management policies in order to maintain key credit metrics near the current levels on a sustained basis (cash flow-to-debt at or above 10%, debt-to-capital below 65%, and EBIT-to-interest coverage above 1.5 times).

Morningstar DBRS could consider a negative rating action if MRG were unable to manage the remuneration haircut, resulting in the cash flow-to-debt ratio falling below 9.0% and debt-to-capital rising above 65%, both over an extended time frame. Morningstar DBRS also notes that, because the remuneration haircut is to be phased in gradually, some credit metrics may not be maintained over the medium term. Nevertheless, MRG´s flexible dividend policy could help mitigate the potential negative remuneration impact.

EARNINGS OUTLOOK
Looking ahead, with the regulatory haircut in place for the remainder of the current regulatory period, Morningstar DBRS expects MRG's earnings to slightly decrease during the next three years. In addition, Morningstar DBRS notes that earnings could be affected by lower gas demand as a result of warmer temperatures as happened in 2023. However, Morningstar DBRS also considers this possibility to be partially mitigated by the lower energy prices expected for at least the next year.

FINANCIAL OUTLOOK
Morningstar DBRS expects the Issuer to maintain its current capital structure with debt-to-capital above 50%. Apart from the refinancing of the bond maturing in 2025, no additional debt is expected to be raised in the next two years.

CREDIT RATING RATIONALE
The credit ratings recognise MRG´s (1) stable regulated business, comprising 98% of total revenues in 2023; (2) relatively strong franchise area; and (3) stable regulatory framework, with the current regulatory period for 2021-26 consistent with the previous framework, providing remuneration based on the growth in demand and connection points rather than assets and the incentive to optimise operating and capital expenditures. The credit ratings are constrained by (1) the current litigation with the CNMC, albeit it is expected to be resolved over the short to medium term and (2) the haircut applied for the current regulatory period.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance 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) at https://dbrs.morningstar.com/research/427030.

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of BRA Factors
In the analysis of MRG Finance, the relative weighting of the BRA factors listed in the Regulated Utilities section was approximately equal.

(B) Weighting of FRA Factors
In the analysis of MRG Finance, the FRA factor listed in the Regulated Utilities section, cash flow-to-debt was considered more important.

(C) Weighting of the BRA and the FRA
In the analysis of MRG Finance, 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 (15 April 2024), https://dbrs.morningstar.com/research/431184.

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (15 April 2024, https://dbrs.morningstar.com/research/431186), which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodology has also been applied: Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024), https://dbrs.morningstar.com/research/427030

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/431153.

The primary sources of information used for these credit ratings include audited financial statements, management presentations, forecasts, and information provided by the company. Morningstar DBRS considers the information available to it for the purposes of providing these credit ratings to be of satisfactory quality.

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.

These credit ratings are under review. Generally, the conditions that lead to the assignment of reviews are resolved within a 90-day period. Morningstar DBRS reviews 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/432992

These credit ratings are 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: 17 August, 2020
Last Rating Date: 1 August, 2023

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

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