Yesterday, the Fitch Ratings Agency affirmed a BBB- rating for Nuclealectrica, with a stable outlook. In this brief research piece, we bring you the main highlights that led to this decision.
According to Fitch, this rating reflects Nuclearelectrica’s (SNN) strong market position as the sole producer of electricity from low-cost nuclear power plants in Romania, its solid position in the merit order, and the low net leverage at least until 2025. However, a large CAPEX plan, in particular the refurbishment of nuclear unit 1, which will not be operational in 2027-2029, will considerably increase net leverage from 2027. This might lead to a negative rating action depending on the 2027-2030 financial profile, potential support measures from the Romania state as the majority shareholder, changes in revenue visibility due to possible contracts for difference (CfD), and progress with other projects, among other things.
In terms of the key rating drivers, Fitch noted a solid business profile, healthy profitability, a large investment plan, rising leverage, rating pressure, medium-term projects, GRE linkage, relationship with sovereign rating, and electricity price cap as the main points.
In terms of the business profile, it is supported by SNN’s strong market position as the sole producer of electricity based on nuclear technology, covering 20% of total electricity demand and 35% of electricity produced without greenhouse gas emissions in Romania. In terms of profitability, in 2022 EBITDA grew by more than 2x YoY due to high electricity prices in contracts and on the spot market. Fitch expects this to remain healthy in the 2023-2026 period, with an avg. annual EBITDA of around EUR 1.9bn.
In terms of the investment plan, Fitch expects high CAPEX, on average at around RON 1.8bn per year in the 2023-2027 period, mainly related to the refurbishment of unit 1 and the heavy water detritylation project. Rising leverage is expected due to this CAPEX and the shutdown of unit 1. As such, FFO (funds from operations) to net leverage is expected to rise sharply in the 2027-2029 period. This might also lead to a negative rating action, but the decision will depend on the projected financial profile in the 2027-2030 period.
Moving on to medium-term projects, for the construction of units 3 and 4, the state support agreement signed in 2023 assumes state guarantees for the new debt to be incurred by the vehicle that will implement the capex and CfD mechanism. In terms of the GRE linkage, the Romanian state has 82.5% majority ownership in SNN, and Fitch expects that the State will continue supporting SNN as it is seen as of strategic importance.
Due to the linkage between the State and the Company, changes in one’s rating could influence the other, with of course the State’s rating influencing SNN more than the other way around. Finally, in terms of the electricity price cap, a new regulation adopted at the end of 2022 requires generators to sell up to 80% of generated volumes between January 2023 and March 2025 through a centralized electricity purchase mechanism (MACEE), at a fixed price of RON 450/MWh. In 2023, SNN will sell about 50% of electricity through MACEE, due to bilateral contracts concluded before the regulation was introduced.
The entire report can be accessed here.
Nuclearelectrica and other select Romanian energy companies’ performance* (2023 YTD, %)
Source: Bloomberg, InterCapital Research
*Hidroelectrica’s share price as of IPO in July 2023, and as such the value represented before that is 0.
