Morningstar DBRS Confirms Issuer Ratings on EDP - Energias de Portugal, S.A. and EDP Finance B.V. at BBB, Stable Trends

DBRS Ratings GmbH (Morningstar DBRS) confirmed the Issuer Ratings on EDP - Energias de Portugal, S.A. (EDP or the Group) and EDP Finance B.V. at BBB with Stable trends.

KEY CREDIT RATING CONSIDERATIONS
EDP operates in the energy generation, distribution, and supply markets. The Group holds a monopolistic position in Portugal as the dominant distribution system operator. EDP is one of the main renewable energy groups in the Iberian Peninsula with 95% of its generation output coming from renewable sources through its 27.3 gigawatt (GW) of renewable installed capacity, including hydro, wind, and solar generation, at YE2024. The Group's business risk profile benefits from regulated revenues from electricity distribution in Portugal, Spain, and Brazil (about 34% of total EBITDA at YE2024) and from contracted electricity generation with minimal merchant exposure. The Group is currently executing its ambitious business plan to reinforce its leading position in the energy transition by reaching around 33 gigawatts (GW) of renewable installed capacity at YE2026 through an investment of around EUR 17 billion.

EDP Finance's rating is largely based on EDP's rating adjusted for structural subordination, which is partially mitigated by the keep-well agreement between both companies.

The Stable trends reflect Morningstar DBRS' view that the key financial metrics of both EDP and EDP Finance will remain supportive of the BBB rating threshold for the foreseeable future, although it expects some deterioration because of the planned high-investment volume.

CREDIT RATING DRIVERS
Although a credit rating upgrade is not likely in the short term, Morningstar DBRS would 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 remain well above 4.0 times (x) on a sustained basis. Morningstar DBRS would consider a credit rating downgrade if the cash-flow-to-debt ratio deteriorated below 12.0%, debt-to-capital rose above 65.0%, and EBITDA-to interest remained below 3.0x.

EARNINGS OUTLOOK
Morningstar DBRS expects a moderate increase in EDP's earnings for the next two years compared with 2024 thanks to the higher installed capacity and generation output, but in a more normalised power price environment compared with 2022 and H1 2023. However, although cash flow from operations will remain strong, Morningstar DRBS anticipates high negative free cash flow because of 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 2024, EDP's gross debt amounted to EUR 20.2 billion and Morningstar DBRS anticipates debt to increase by 30% in the next three years, leading cash flow-to-debt rising to 11.9%. However, this metric would improve if the Group successfully completed its asset rotation strategy.

CREDIT RATING RATIONALE
The Issuer Ratings of EDP and EDP Finance are supported by the following key factors: (1) EDP's monopolistic position in the Portuguese electricity distribution market and its position among the leading renewable companies worldwide; (2) a high level of diversification in business, technologies, geography, and supportive regulatory frameworks, which partially reduce revenue fluctuations; (3) predictable and recurrent cash flow generation thanks to its regulated activities in electricity distribution and its contracted generation business; (4) a well-spread maturity calendar and adequate liquidity profile with around EUR 7,500 million of available credit facilities at YE2024 to cover debt maturities; (5) the asset rotation strategy developed by the Group to reinvest in renewable growth; and (6) the keep-well agreement provided by EDP to EDP Finance under the Euro Medium-Term Note program that partially mitigates the lack of guarantee from EDP for EDP Finance. The Group's creditworthiness is constrained by the (1) high level of capital expenditure of around EUR 6.2 billion expected in the next two years to achieve the business plan; (2) merchant risk for non-contracted generation; (3) changes in the regulatory frameworks leading a less supportive regulations; and (4) operational risk associated with the business plan execution.

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) at https://dbrs.morningstar.com/research/437781.

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of BRA Factors
In the analysis of EDP and EDP Finance, the BRA factors are considered in the order of importance contemplated in the methodology.

(B) Weighting of FRA Factors
In the analysis of EDP and EDP Finance, 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 EDP and EDP 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 (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 (3 February 2025; https://dbrs.morningstar.com/research/447186), 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 Financial results and public information. Morningstar DBRS considers the information available to it for the purposes of providing these credit ratings to be of satisfactory quality.

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/449933.

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: 15 February 2024
Last Rating Date: 15 February 2024

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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