DBRS Ratings Limited (DBRS Morningstar) assigned an Issuer Rating and a Euro Medium Term Notes rating of BBB (low) with Stable trends to Madrileña Red de Gas Finance B.V. (MRG Finance or the Issuer). MRG Finance is the financing entity for Madrileña Red de Gas, S.A.U. (MRG or the Guarantor), and all current debt issued by MRG Finance is guaranteed by MRG. As such, the ratings on the Issuer are based on the credit quality of the Guarantor.
MRG is a regulated natural gas distributor operating in Madrid. DBRS Morningstar considers MRG’s regulatory framework to be reasonable for the BBB rating range as it provides a very steady stream of earnings and cash flow. Almost all of MRG’s operations are regulated (98% of 2019 revenues). The next regulatory period will be the six years from 2021 to 2026, and is largely a continuation of the current framework where the base remuneration is adjusted based on the annual changes in the volume of natural gas distributed and the number of connection points. DBRS Morningstar considers this framework to have less certainty of full recovery of costs, including capital expenditures (capex). DBRS Morningstar notes, however, that this is mitigated by MRG's minimal capex requirement (maintenance capex of around EUR 1.0 million to EUR 2.0 million annually) and that most of the expansionary capex is discretionary.
MRG's key credit metrics have been weak for the BBB rating range. While the EBIT-interest coverage ratio had been stronger, it is expected to weaken over the next regulatory period. The regulator has estimated a preliminary remuneration haircut of EUR 34.1 million to be phased in over six years; there is no definitive date regarding the timing of the decision of the final haircut. MRG's debt-to-capital and cash flow-to-debt metrics have been in the BB category (averaging at, respectively, around 75.0% and 10.0% over the past five years), and are expected to weaken to 80.0% and 9.0%, respectively, over the next regulatory period. DBRS Morningstar has factored the full preliminary haircut along with the weaker key credit metrics into its consideration for the BBB (low) rating. A negative rating action is possible if MRG is unable to manage the remuneration haircut, resulting in the cash flow-to-debt ratio falling below 9.0% for an extended time frame. DBRS Morningstar also notes that because the remuneration haircut will be phased in gradually, the metrics will become increasingly more difficult to maintain over the medium term. If MRG is able to demonstrate that it can prudently manage its dividends and debt load better than expectation and maintain its key credit metrics in the BBB rating range (specifically, the cash flow-to-debt ratio above 10.0%) on a sustained basis, then a positive rating action may occur.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.
All figures are in euros unless otherwise noted.
The principal applicable methodology is Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry (16 September 2019). Other applicable methodologies include the DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (25 November 2019); and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (22 January 2020). These can be found can be found at: http://www.dbrsmorningstar.com/about/methodologies.
For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.
The primary sources of information used for these ratings include audited annual accounts for MRG and MRG Finance, Base Prospectus and Final Terms for MRG Finance’s debt issuances, MRG’s business and financial projections, regulatory documents for MRG, meetings with management, and all written correspondence as of today. DBRS Morningstar considers the information available to it for the purposes of providing these ratings to be of satisfactory quality.
DBRS Morningstar does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.
Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.
For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.
The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/365848/.
Ratings assigned by DBRS Ratings Limited are subject to EU and U.S. regulations only.
Lead Analyst: Rana Toukan, Vice President
Rating Committee Chair: Andrew Lin, Managing Director
Initial Rating Date: 17 August 2020
Last Rating Date: Not applicable as there is no last rating date.
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-- Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry (16 September 2019),
--DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating (25 November 2019), https://www.dbrsmorningstar.com/research/353260/dbrs-morningstar-criteria-rating-corporate-holding-companies-and-parentsubsidiary-rating-relationships
--DBRS Morningstar Criteria: Guarantees and Other Forms of Support Rating (22 January 2020),
Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com.