Morningstar DBRS Confirms AB Ignitis grupe Issuer Rating at BBB (high), Stable Trend

DBRS Ratings GmbH (Morningstar DBRS) confirmed the Issuer Rating of AB Ignitis grupe (Ignitis or the Company) at BBB (high) with a Stable trend.

KEY CREDIT RATING CONSIDERATIONS
The credit rating confirmation reflects Ignitis' (1) market-leading position in Lithuania, (2) the regulated distribution operations providing a source of stable cash flows, and (3) the implicit sovereign support from the Republic of Lithuania (rated A (high) with a Stable trend by Morningstar DBRS). Morningstar DBRS views these strengths as being partially offset by the Company's (1) significant planned growth in renewable generation assets, which exposes the Company to project execution risk; (2) the Company's relatively low proportion of electricity sold through long-term contracts which is partially mitigated by their portfolio hedging levels (75% hedged 2024 and 56% for 2025 as at June 30, 2024); and (3) the limited geographical diversification of generation assets. The Stable trend reflects Morningstar DBRS' expectations that the Company's business risk and financial risk assessment will remain supportive of the credit rating for the foreseeable future.

CREDIT RATING DRIVERS
Morningstar DBRS does not expect to take a positive credit rating action in the near term without a material improvement in the Company's business risk assessment. Conversely, a negative credit rating action could occur if cash flow to debt decreases to less than a level commensurate with the credit rating on a sustained basis either because of increased debt, low electricity prices, or poor operating performance. Additionally, Morningstar DBRS may take a negative credit rating action if the EBITDA contribution from regulated operations decreases to less than 40% on a sustained basis.

EARNINGS OUTLOOK
In 2024, Morningstar DBRS anticipates an increase in revenues based on a stronger performance of their reserve capacities segment. However, for 2025 it is estimated that revenues will decline based on lower realized electricity prices anticipated. Morningstar DBRS expects an adjusted 2024 EBITDA within the lower range of the Company's guidance (EUR 450 million to EUR 480 million EBITDA) and an improvement in 2025, given that the effect of higher tariffs set during H1 2024 will be captured on a full-year basis in 2025.

FINANCIAL OUTLOOK
According to the Company´s strategy, the Company plans to invest between EUR 3 billion to EUR 4 billion during the 2024-27 period, consisting of higher renewable capacity and network updates, which Morningstar DBRS expects will be front loaded, increasing the Company's financial leverage in the short term. Morningstar DBRS expects Ignitis' key financial metrics to weaken from current levels, although, remain supportive of its current credit rating category.

CREDIT RATING RATIONALE
The Company's overall business risk profile remains stable with EBITDA contribution across business segments remaining relatively stable. Morningstar DBRS notes that the Company is targeting investing between EUR 3.0 billion to EUR 4.0 billion between 2024 and 2027, with 60% toward their renewable segment and 33% on its regulated business. Morningstar DBRS expects this to result the Company's business segment EBITDA contribution as remaining relatively stable between power generation and regulated operations.

Morningstar DBRS notes that the Company plans to install 4 gigawatts to 5 gigawatts of generation projects by 2030, which exposes the Company to project execution risk. Morningstar DBRS notes that the Company has a record of successfully completing generation projects. Morningstar DBRS notes that completed generation projects are once completed will be contracted, increasing the stability of the generation segment.

Morningstar DBRS' credit rating incorporates implicit support from the Republic of Lithuania given (1) the essential service that Ignitis provides to the Lithuanian population, (2) the significant geographical coverage of the electric grid and gas networks, and (3) its 74.99% ownership of the Company.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) 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 Factors in Credit Ratings (13 August 2024), https://dbrs.morningstar.com/research/437781.

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)
Weighting of BRA Factors 
In the analysis of Ignitis, the BRA factors were considered in the order of importance contemplated in the methodology.
 
Weighting of FRA Factors 
In the analysis of Ignitis, the FRA factors were considered in the order of importance contemplated in the methodology.

Weighting of the BRA and the FRA 
In the analysis of Ignitis, the BRA carries greater weight than the FRA. 
 
Notes:
All figures are in euros unless otherwise noted.

Morningstar DBRS applied the following principal methodologies:
-- Global Methodology for Rating Companies in the Regulated Utility and Independent Power Producer Industries (27 June 2024), https://dbrs.morningstar.com/research/435127

Morningstar DBRS credit ratings may use of 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 methodologies have also been applied:
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (13 August 2024), https://dbrs.morningstar.com/research/437781

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 this credit rating include audited financial statements, quarterly results reports and presentations, presentation transcripts, and publicly available regulatory information. Morningstar DBRS considers the information available to it for the purposes of providing this credit rating to be of satisfactory quality.

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/442739.

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

Lead Analyst: Pablo Santin, Assistant Vice President, Credit Ratings
Rating Committee Chair: Anke Rindermann, Managing Director, Credit Ratings
Initial Rating Date: 10 November 2023
Last Rating Date: 10 November 2023

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

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