Morningstar DBRS Confirms Latvenergo AS' Issuer Rating of BBB, Maintains Stable Trend

DBRS Ratings GmbH (Morningstar DBRS) confirmed the Issuer Rating of Latvenergo AS (Latvenergo, or the Company) at BBB with a Stable trend.

KEY CREDIT RATING CONSIDERATIONS
Morningstar DBRS considers Latvenergo's credit rating is supported by its competitive market position in the Baltics, low-cost hydroelectric generation facilities, regulated earnings through its wholly owned electricity distribution subsidiary of Sadales tikls As (Sadales tikls), and strong financial metrics. Morningstar DBRS views these strengths as being partially offset by Latvenergo's limited geographical and generation diversification, project development risk exposure, and short generation position. Morningstar DBRS notes that Latvenergo is 100% owned by the Republic of Latvia (Latvia, rated "A" with a Stable trend by Morningstar DBRS).

CREDIT RATING DRIVERS
Morningstar DBRS could take a positive credit rating action if there is a material improvement in the Company's business risk profile through an improved contractual hedging profile for the power business. Morningstar DBRS could also consider a positive credit rating action if there is a material improvement in its view of the regulation subfactor for the Company's regulated business, while the Company maintains strong sustained financial metrics. Morningstar DBRS may take a negative credit rating action if the cash flow-to-debt ratio falls below 15.0% on a sustained level. Morningstar DBRS could also take a negative credit rating action if the Company's share of EBITDA from its regulated distribution business decreases significantly below 35% on a sustained basis.

EARNINGS OUTLOOK
The Company had strong earnings in 2023 because of the strength in its hydroelectric generation business. The hydroelectric generation levels were the highest in 25 years. Latvenergo's regulated earnings also improved from increased rates being effective for Sadales tikls on July 1, 2023. For the first nine months of 2024 output at the Daugava hydroelectric plants decreased compared with the same period for 2023 because of lower water inflow. However, total electricity output increased because of more favourable market conditions for the natural gas-fired combined heat and power plants. Earnings before interest, taxes, depreciation, and amortisation (EBITDA) for the first nine months of 2024 improved compared with 2023 primarily because of the higher rates at Sadales tikls, lower natural gas prices, and increased electricity volumes.

FINANCIAL OUTLOOK
Morningstar DBRS expects revenues to decrease going forward because of lower Nord Pool Power prices and hydroelectricity generation returning to long-term average levels. Over the long term, Morningstar DBRS expects the Company's power generation business to account for approximately 65% of total EBITDA with its regulated distribution business accounting for the remaining 35%, assuming normalised generation and Nord Pool power prices.

The Company is undertaking a significant development plan with investment into new development projects. Morningstar DBRS expects that some of this growth will be funded with debt, which would increase leverage in the near term. Morningstar DBRS expects that financial metrics will continue to support Latvenergo's current credit rating level. Morningstar DBRS notes that the Company has a policy to pay out 64% of its earnings as dividends.

CREDIT RATING RATIONALE
Latvenergo's overall business risk profile has been stable. Morningstar DBRS expects that over the long run the Company's power generation business will contribute approximately 65% of EBITDA with the remaining 35% coming from its regulated distribution business, assuming normalised hydroelectric production and Nord Pool power prices. The Company continues to benefit from its low-cost hydroelectric generation. Morningstar DBRS notes that Latvenergo is proceeding with its plan to grow its renewable energy business to more than 2,300 megawatts (MW) from its existing renewable capacity of 105 MW. Morningstar DBRS views that this plan exposes Latvenergo to project development and execution risk, but the successful completion of projects will improve generation diversification and reduce the Company's short power market position. Morningstar DBRS notes that in 2024 the Company formed a subsidiary to develop its renewable energy project to help improve Latvenergo's ability to develop and execute renewable projects going forward.

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 Factors in Credit Ratings (13 August, 2024) https://dbrs.morningstar.com/research/437781

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

A) Weighting of BRA Factors
In the analysis of Latvenergo AS, the BRA factors are considered in the order of importance contemplated in the methodology.

B) Weighting of FRA Factors
In the analysis of Latvenergo AS, the FRA factors are considered in the order of importance contemplated in the methodology.

C) Weighting of the BRA and the FRA
In the analysis of Latvenergo AS, 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 (25 November 2024), https://dbrs.morningstar.com/research/443429

The following methodologies have also been applied:
-- Morningstar DBRS Global Corporate Criteria (15 April 2024)
https://dbrs.morningstar.com/research/431186
-- Morningstar DBRS Criteria: Approach to ESG 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, 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/444981.

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

Lead Analyst: Adam Provencher, Vice President, European Corporate Ratings,
Rating Committee Chair: Anke Rindermann, Managing Director, European Corporate Ratings
Initial Rating Date: December 21, 2023
Last Rating Date: December 21, 2023

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

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