Electrica Group is one of the main distributors and suppliers of electricity on the Romanian market. The Group’s core business segments are the distribution of electricity to users and the supply of electricity to household and non-household consumers. Recently, it has received a Fitch Rating of BBB (investment grade) after a complex process of evaluation. Business Review talked to Mihai Darie, CFO, to find out more about the rating and the activity of the company.
Business Review: What is the enrollment process for obtaining a Fitch Rating?
Mihai Darie: Electrica Group is a stable company, committed to ongoing growth and strengthening the trust of our investors. Five years ago, the Group was listed on BSE and LSE, marking the most successful listing on the Romanian stock exchange and, right from the beginning, we were set on a growth track to deliver constant returns to investors by developing the Group and diversifying the services provided on the market. Electrica Group is the largest investor in Romania’s energy infrastructure, and we managed in the last 5 years to extend our services portfolio, while the dividend value offered the most stable return on investment among all companies included in the BET index.
We are on an ambitious track to develop the company, and we want to diversify and extend the footprint both locally and regionally. In this context, a rating issued by a prestigious rating agency is a key-instrument in meeting our long-term objectives. Having this in mind, we selected a rating agency (Fitch Ratings) and filed an application for a corporate rating.
What a credit rating does for a company is almost equivalent to a ‘guarantee’ regarding the entity’s status, its borrowing capacity and ability to honor the financial obligations on time. The rating is important since it can position a company into a broader context, offering the adequate opening towards the local and international debt capital markets.
Based on the information provided by Electrica Group and the evaluation performed by the rating agency, Fitch Ratings affirmed Electrica’s corporate rating at ‘BBB’ (Investment Grade) with a stable outlook.
What criteria does a company need to meet in order to earn a certain rating and how did Electrica manage to fulfill them?
Among the main criteria analyzed into detail by credit rating agencies, we could mention business risk analysis, financial analysis, management evaluation, business analysis, regulatory and competitive environment, as well as fundamental analysis. Other key-factors that Fitch takes into consideration when assessing a company’s rating are the type of debt that the respective company holds, and how sensitive it is to various risk factors, as well as to the systemic changes like interest rates.
Each of these evaluations received from a rating agency works as a ‘signal’ to the potential investors, in order to show how financially stable the company is and what risks are taken by a person who invests in that company (i.e. low, medium or high).
Altogether, these factors converged towards a positive evaluation from Fitch Ratings, which reinforces the message that Electrica Group is a strong, stable company and a trusted partner.
In order to obtain the ‘BBB’ rating, Electrica Group showed a solid financial profile. An important factor in receiving this rating was also the potential of maintaining a high investment level in the following years. Electrica Group is exploring various options for a more diverse spectrum of financing its operations, and this is one of the main reasons why the company enrolled for a corporate credit by a reputable rating agency like Fitch Ratings.
The meaning of this ‘BBB’ rating with stable outlook in the financial world is key for the potential investors that target a certain company. The investment grade corporate rating is a pre-requisite for a successful corporate bond issue, should the company decide to use this type of financing in the future.
What does this rating mean for the company?
The financial opinions regarding credit risk are very important for worldwide investors, and the existence of a rating history comes with great advantages. When considering a bond issue or contracting other type of external funding, a positive and stable rating influences the successful placement of liabilities, giving access to loan instruments under favorable terms.
We are confident that the rating will strengthen the trust we have from our shareholders and will work as an added value argument for potential new investors.
Electrica has an approximate number of 7,000 shareholders in over 30 countries and it is constantly present in the most valuable Romanian brands ranking. Electrica has a market capitalization of almost RON 4 billion and it is the only Romanian utility company listed on the Bucharest Stock Exchange.
What is the current situation of Electrica SA – financial assets, profit evolution? What is the investment necessary and in what areas? (equipment, power grid)?
After nine months of 2019, Electrica Group had a favorable evolution of the net profit, which translates into 133 percent of the Group’s budget target for the year 2019.
Through the IPO which occurred in 2014, Electrica managed to attract approximately RON 2 billion that were invested in two strategic directions: the development of an ambitious investment plan and the prospect of mergers and acquisitions.
Electrica Group has become the biggest investor in the modernization of the electricity distribution networks, with a total investment of RON 3.1 billion in the five years following the IPO. Thanks to these investments, the quality of service offered by distribution companies in the Group has improved, and this was an important factor for achieving solid financial results and a stable perspective.
Another part of the funding generated through the initial public offer was used, at the end of 2017, to acquire the minority holdings that Fondul Proprietatea had in the distribution and supply subsidiaries of Electrica Group.
What was the biggest challenge Mihai Darie encountered after taking over the position of CFO?
One of the biggest challenges when taking over the CFO position at Electrica was to overcome the instability that governs the Romanian market, the regulatory and fiscal policy changes that affect the investment decisions and induce more volatility of results – one of our key concerns. The Romanian energy market is going through a time of increased volatility, as a result of the convergence of several factors: the changes in the regulatory framework, the new standards regarding the quality of service, and, also important, the perspective of a fully liberalized market.
The potential is real, but the industry needs new strategies and policies to ensure the security of supply on a long term, while maintaining the economy competitive, stable and predictable. This climate could help attracting private capital, in order to support investments on the long run, providing trust and offering the prospect of an efficient return of investment.
Last, but not least, improving the finance organization throughout the Group, by attracting and retaining the right people, advocating for team work with focus on quality, as well as maintaining high standards of control and professionalism were key for a successful role of a true business partner at all levels, as well as for ensuring meaningful financial information are provided to all stakeholders.