Morningstar DBRS Assigns Issuer Rating of A (low) to Elia Transmission Belgium, S.A. and BBB (high) to Elia Group, S.A., Both With Stable Trends

DBRS Ratings GmbH (Morningstar DBRS) assigned Issuer Ratings of A (low) to Elia Transmission Belgium, S.A. (ETB) and BBB (high) to Elia Group, S.A. (Elia Group or the Group), both with Stable trends.

KEY CREDIT RATING CONSIDERATIONS
Elia Group is the ultimate holding company of two European Transmission System Operators (TSO), ETB, operating in all of Belgium, and 50Hertz, operating in the north and east of Germany. Elia Group holds a 99.98% stake in ETB and an 80% stake in Eurogrid, the holding company of 50Hertz; the other 20% stake is held indirectly by German state-owned Kreditanstalt fuer Wiederaufbau (KfW). Both TSOs operate as natural monopolies in their respective areas performing regulated activities (almost 100% of Elia Group's total EBITDA). ETB's regulatory framework is based on a cost-plus model and the current regulatory period, which will be in place from 2024 to 2027, allows a return on assets (ROE) of 7.2%. Eurogrid's regulatory framework is based on a revenue cap model for the onshore assets while the offshore asset framework is based on a cost-plus model; the current regulatory period runs from 2024 to 2028 with an allowed ROE of 5.78% for offshore and 5.07% for onshore. Morningstar DBRS considers both regulatory frameworks as highly supportive, providing recurrent and stable cash flow generation.

Elia Group is currently developing a significant growth plan due to the energy transition and the need to invest in grids. Between 2024 and 2028, the Group plans to invest EUR 30.1 billion of which EUR 9.1 billion will be for ETB, and EUR 21 billion will be invested in Eurogrid. Although this significant growth is expected to be primarily funded by increasing debt, Morningstar DBRS expects some equity injections coming from the main shareholder, Publi-T (44.8% stake in Elia Group), which signed a Heads of Agreement with Fluxys SA/NV to create a new subsidiary to support the Group's growth through capital contributions. In this new subsidiary, Publi-T will continue as the main shareholder, while Fluxys will participate as a minority investor.

The Stable trends reflect Morningstar DBRS' view that both Elia Group and ETB´s key financial metrics will remain supportive of a BBB (high) and A (low) threshold, respectively, for the foreseeable future, although Morningstar DBRS expects some deterioration due to the planned high-investment volume.

CREDIT RATING DRIVERS
Although a credit rating upgrade is not likely at this time, Morningstar DBRS could consider an upgrade if the cash flow-to-debt ratio were to improve to well above 15.0%, debt-to-capital to below 50.0%, and EBITDA-to-interest remains well above 4.0 times (x) on a sustained basis. Morningstar DBRS could consider a credit rating downgrade if cash-flow-to-debt ratio deteriorates below 6.5%, debt-to-capital above 70.0%, and EBITDA-to-interest remains below 2.0x.

EARNINGS OUTLOOK
Morningstar DBRS expects a moderate increase in earnings for Elia Group and ETB thanks to the higher equity remuneration for the current regulatory periods for both the Belgium and the German regulatory frameworks. In addition, Morningstar DBRS notes increasing incentives derived from the strong operational performance and the asset growth. However, although cash flow from operations will remain strong, Morningstar DBRS anticipates high negative free cash flow due to the high planned investments.

FINANCIAL OUTLOOK
Morningstar DBRS expects a significant increase in debt during the next years to support the growth plan and cover the expected negative free cash flow. At the end of June 2024, Elia Group's gross debt amounted to EUR 12.9 million at Elia Group and EUR 4.4 million at ETB. Morningstar DBRS anticipates debt to increase by more than double in the next three years, leading cash flow to debt to 7.7x at Elia Group and to 8.7x at ETB level. In addition, Morningstar DBRS expects some support from the main shareholder through equity injections to protect the financial leverage and let Elia Group and ETB keep the investment grade.

CREDIT RATING RATIONALE
Elia Group´s Issuer Rating is supported by the following key factors: (1) a natural monopolistic position in the areas the TSOs operate; (2) almost 100% of EBITDA comes from its regulated activity; (3) a strong and highly supportive regulatory framework, which provides predictable and stable cash flow generation. However, Elia Group´s Issuer Rating is constrained by the following: (1) structural subordination arising from the regulatory ringfence at ETB and Eurogrid; (2) an aggressive growth plan for the next few years, (3) operational risk arising from complex project development.

ETB´s Issuer Rating is supported by the following key factors: (1) a natural monopolistic position in Belgium as it is the only TSO in the country; (2) around 95% of EBITDA comes from its regulated activity; (3) a strong and highly supportive regulatory framework, which provides predictable and stable cash flow generation; (4) implicit parent support through equity injections. However, ETB´s Issuer Rating is constrained by the following: (1) an aggressive growth plan for the next few years, and (2) operational risk arising from complex project development.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental, Social, or 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 Elia Group and ETB, the BRA factors are considered in the order of importance contemplated in the methodology.

(B) Weighting of FRA Factors
In the analysis of Elia Group and ETB, 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 Elia Group and ETB, 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

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 criteria has also been applied:

-- 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 these credit ratings include Public audited financial statements, financial reports, and public information. Morningstar DBRS considers the information available to it for the purposes of providing these credit ratings to be of satisfactory quality.

These credit ratings concern newly rated issuers. These are the first Morningstar DBRS credit ratings on these issuers.

With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, these are unsolicited credit ratings. These credit ratings were 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/445151.

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: 30 December 2024
Last Rating Date: Not applicable as there is no last rating date.

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

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