Fitch keeps Romanian electricity distribution company Electrica at BBB-/negative

International rating agency Fitch affirmed on March 10 its BBB- Long-Term Issuer Default Rating (IDR) for Romanian electricity distribution company Electrica (BVB: EL) and maintained the negative rating.

One year earlier, in March 2022, Fitch downgraded the company's rating by one notch, citing its extremely weak performance in 2021 "due to abnormally high energy procurement costs needed to cover its unhedged supply position and significant network losses."

The "cap and subsidy" scheme implemented by the Romanian Government in 2021 for protecting households and companies is at the origin of Electrica's downgrade last year, and the rating logic focuses on the company's ability to handle the high debt leverage created by the scheme. In brief, Fitch sees the revised scheme as not generating further losses, but it expects Romanian distribution firms to be able to recover the losses incurred in 2022 only over the next five years and no sooner.

The affirmation of the ratings reflects the rating agency's expectation of a normalisation of Electrica's operational performance from 2023, supported by the final regulatory determinations for the recovery of costs related to 2022 network losses and by the full recovery of the revenue/cost mismatch created by supply price caps mechanism.

"The new [cap and subsidy] system should make unlikely the accumulation of additional mismatch due to price caps. On the other hand, at least for 2023 we see it rather challenging to achieve any meaningful spread between the electricity sold to final clients and that purchased in the wholesale spot market (RON0.7/KWh average price in January 2023)," the rating agency explained.

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