Rating Action: Moody's affirms EDP's Baa3 rating; outlook stable
Global Credit Research - 25 Jul 2020
London, 25 July 2020 -- Moody's Investors Service ("Moody's") has today affirmed the Baa3 senior unsecured ratings, the (P)Baa3 senior unsecured MTN program rating, the Ba2 junior subordinate debt rating and the Prime-3 commercial paper rating of EDP - Energias de Portugal, S.A. ("EDP"). Concurrently, Moody's has affirmed the Baa3 senior unsecured ratings, the (P)Baa3 senior unsecured MTN program rating and the Prime-3 commercial paper rating of EDP Finance B.V.. The outlook on all ratings remains stable.
A full list of affected ratings is provided towards the end of this press release.
The rating action follows the announcement on 15 July  by EDP that it entered into an agreement to acquire Viesgo, which owns electricity distribution networks in Spain (with a regulated assed base of EUR1.0 billion), over 500 MW of net renewable capacity in Iberia and two coal-fired power plants to be decommissioned in 2021, for an enterprise value of EUR2.7 billion. The transaction is expected to close by the end of 2020. The rating affirmation reflects (1) Moody's view that the acquisition of Viesgo is moderately positive for EDP's business risk profile; and (2) the neutral impact of the transaction on EDP's financial profile given the partial equity funding thereof.
In Moody's view, the acquisition of Viesgo represents a strong industrial and strategic fit with EDP's existing activities in Spain. EDP will combine its existing adjacent Spanish electricity distribution network with those of Viesgo, thus creating a business with an aggregate regulated asset base of EUR1.8 billion. Electricity distribution networks in Spain benefit from revenue visibility until year-end 2025 with an allowed return of 5.58% (nominal, pre-tax). Through the acquisition, EDP also reinforces its position in onshore wind in Iberia. Finally, based on Moody's estimates, the transaction allows EDP to further increase the share of EBITDA stemming from regulated network activities to 30% pro-forma for the transaction from 27% in 2019.
From the financial risk perspective, Moody's expects the transaction to have a broadly neutral impact on EDP's credit metrics. This is because the company will fund the purchase price with a mix of debt and equity, including a EUR1.02 billion  fully underwritten share capital increase and the disposal of a portfolio of thermal assets and supply clients in Spain. In addition, Macquarie Infrastructure and Real Assets, which will own a 24.9% interest in the combined Spanish network business, will contribute EUR0.7 billion in the form of cash equity and debt. Moody's therefore expects that EDP will demonstrate a ratio of funds from operations (FFO)/net debt at or above 15% in 2020 and 2021 when factoring in the expected disposal of certain hydropower assets later this year.
More generally, EDP's Baa3 rating continues to be supported by (1) its position as Portugal's largest utility and diversified business and geographical mix; (2) its high share of regulated and contracted activities (around 80% of EBITDA); (3) the group's track record of rotating assets to alleviate financing needs; and (4) the 21.5% ownership by China Three Gorges Corporation (A1 stable). These positives help offset (1) the earnings volatility stemming from variations in hydro output in Iberia and, to a lesser extent, wind resource globally; (2) the execution risks associated with a significant capital spending over 2019-22; (3) the adverse effects of the coronavirus outbreak on power prices and electricity demand in Brazil and Iberia; and (4) its relatively high dividend payout and leverage, although the latter is declining with the company targeting net debt/ EBITDA (as reported) of 3x by 2022.
The stable outlook is based on EDP's delivery of its strategic plan and the resulting expected deleveraging by 2022, so that FFO/net debt rises over time to the midteens and retained cash flow (RCF)/net debt is sustainably in the low double digits (both in percentage terms).
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The ratings could be upgraded if EDP's progress on the delivery of its strategy were to result in a sustained strengthening of its financial profile, with FFO/net debt around 20% and RCF/net debt in the midteens in percentage terms.
The ratings could be downgraded if EDP's credit metrics appeared likely to remain persistently below the guidance for the Baa3 rating, which includes FFO/net debt in the midteens and RCF/net debt in the low double digits (both in percentage terms).
The principal methodology used in these ratings was Unregulated Utilities and Unregulated Power Companies published in May 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1066389. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
LIST OF AFFECTED RATINGS
..Issuer: EDP - Energias de Portugal, S.A.
....LT Issuer Rating, Affirmed Baa3
....Junior Subordinated Regular Bond/Debenture, Affirmed Ba2
..Commercial Paper, Affirmed P-3
....Backed Senior Unsecured Medium-Term Note Program, Affirmed (P)Baa3
....Senior Unsecured Regular Bond/Debenture, Affirmed Baa3
..Issuer: EDP Finance B.V.
....Backed Commercial Paper, Affirmed P-3
....Backed Senior Unsecured MTN Program, Affirmed (P)Baa3
....Backed Senior Unsecured Regular Bond/Debenture, Affirmed Baa3
..Issuer: EDP - Energias de Portugal, S.A.
....Outlook, Remains Stable ..Issuer: EDP Finance B.V. ....Outlook, Remains Stable
EDP - Energias de Portugal, S.A. is a vertically integrated utility company. It is Portugal's leading electric utility and generated EUR3.7 billion of EBITDA in 2019.
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
 EDP, Regulatory announcement; 15-Jul-2020 https://web3.cmvm.pt/SDI/emitentes/docs/FR76421.pdf  EDP, Regulatory announcement; 16-Jul-2020 https://web3.cmvm.pt/SDI/emitentes/docs/fsd914119.pdf
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.
Paul Marty Senior Vice President/Manager Infrastructure Finance Group Moody's Investors Service Ltd. One Canada Square Canary Wharf London E14 5FA United Kingdom JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Neil Griffiths-Lambeth Associate Managing Director Infrastructure Finance Group JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Releasing Office: Moody's Investors Service Ltd. One Canada Square Canary Wharf London E14 5FA United Kingdom JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454
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