Morningstar DBRS Confirms the Issuer Rating and the Euro Medium Term Notes Credit Rating on Madrileña Red de Gas Finance B.V. at BBB, With Stable Trends

DBRS Ratings GmbH (Morningstar DBRS) confirmed both the Issuer Rating and the Euro Medum Term Notes (EMTN) credit rating on Madrileña Red de Gas Finance B.V. (MRG Finance or the Issuer) at BBB with Stable trends.

KEY CREDIT RATING CONSIDERATIONS
The credit rating confirmations reflect the solid performance in 2024 and the successful refinancing of the EUR 300 million bond maturing in April 2025, through a new EUR 180 million bank facility and available cash. At the end of 2024, the key financial metrics were aligned with our base case expectations, with cash flow-to-debt at 9.7%, debt-to-capital at 53.6%, and EBIT interest coverage at 3.5 times (x), consistent with the investment-grade credit rating.

MRG Finance's Issuer Rating and EMTN credit ratings are based on Elisandra Spain V, S.L.U.'s (Elisandra V or the Guarantor) credit quality. Elisandra V's consolidation perimeter includes Madrileña Red de Gas (MRG), MRG Finance, and Aliara Energía, with the latter focusing on the Group's nonregulated activity to complement and support MRG's core business of gas distribution.

CREDIT RATING DRIVERS
Although a credit rating upgrade is not likely at this time, Morningstar DBRS could consider an upgrade if the cash flow-to-debt ratio were to improve above 12.5%, debt-to-capital were to decline to less than 50.0%, and EBIT-to-interest were to improve to significantly higher than 3.0x on a sustained basis. Conversely, Morningstar DBRS could consider a negative credit rating action if MRG failed to manage the remuneration haircut, resulting in the cash flow-to-debt ratio falling below 9.0% and debt-to-capital rising above 65%, both over an extended time frame. Morningstar DBRS also notes that, because the remuneration haircut is to be phased in gradually, some credit metrics may not be maintained for the remainder of the regulatory period. Nevertheless, MRG´s flexible dividend policy could help mitigate the potential negative remuneration impact.

EARNINGS OUTLOOK
For the 2025-26 period, Morningstar DBRS expects Elisandra V's revenues to continue to be composed primarily of regulated business from MRG, with very low contribution from Aliara Energía. Morningstar DBRS is aware of the reduced earnings because of the regulatory haircut for the remainder of the current regulatory period; although, Morningstar DBRS expects a modest gas demand recovery coupled with the still low energy prices expected for at least the next year.

FINANCIAL OUTLOOK
Morningstar DBRS expects MRG to maintain its current capital structure after the refinancing of the EUR 300 million bond, with debt-to-capital of around than 50% for the assessed perimeter. Although Morningstar DBRS notes there is not any relevant additional debt to be raised at Aliara Energía or MRG, an adjustment to the credit ratings could be considered for structural subordination if a significant amount of debt were issued. For the 2025-26 period, cash flow from operations will likely decrease modestly year over year as the remuneration haircut is phased in and also because of the higher tax payments. The cash flow-to-debt metric is expected to weaken slightly over the forecast period; although, Morningstar DBRS anticipates it will remain above 9.0% on average. Although higher capital expenditure is expected in the coming years due to the meter replacement project and investments in non-regulated activities,, Morningstar DBRS expects the Issuer to be prudent in its dividend and debt management in order to maintain key credit metrics at current levels, which should continue to support the BBB credit rating.

CREDIT RATING RATIONALE
The credit ratings recognise MRG´s (1) stable regulated business, which accounted for 98% of total revenues in 2024; (2) relatively strong franchise area; and (3) stable regulatory framework, with the current regulatory period for 2021-26 consistent with the previous framework, providing remuneration based on the growth in demand and connection points rather than assets and the incentive to optimise operating and capital expenditures. The credit ratings are constrained by (1) weaker forecasted earnings and financial metrics from the haircut applied for the current regulatory period and (2) regulated remuneration based on volume.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (16 May 2025), https://dbrs.morningstar.com/research/454196.

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of BRA Factors
In the analysis of MRG Finance, the relative weighting of the BRA factors listed in the Regulated Utilities section was approximately equal.

(B) Weighting of FRA Factors
In the analysis of MRG Finance, the FRA factor listed in the Regulated Utilities section, cash flow-to-debt was considered more important.

(C) Weighting of the BRA and the FRA
In the analysis of MRG Finance, the BRA carries greater weight than the FRA.

Notes:
All figures are in euros unless otherwise noted.

Morningstar DBRS applied the following principal methodology:
-- Global Methodology for Rating Companies in the Regulated Utility and Independent Power Producer Industries (25 November 2024), https://dbrs.morningstar.com/research/443429

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (3 February 2025; https://dbrs.morningstar.com/research/447186) which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodologies have also been applied:
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (16 May 2025), https://dbrs.morningstar.com/research/454196.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyses corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

The primary sources of information used for these credit ratings include audited financial statements, management presentations, forecast and information provided by the Issuer. Morningstar DBRS considers the information available to it for the purposes of providing these credit ratings to be of satisfactory quality.

Morningstar DBRS does not audit the information it receives in connection with the credit rating process, and it does not and cannot independently verify that information in every instance.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS trends and credit ratings are under regular surveillance.

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

The sensitivity analysis of the relevant key credit rating assumptions can be found at: https://dbrs.morningstar.com/research/455887.

These credit ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Laura Gutierrez, Assistant Vice President
Rating Committee Chair: Amaury Baudouin, Senior Vice President, Sector Lead
Initial Rating Date: 17 August 2020
Last Rating Date: 14 October 2024

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on https://dbrs.morningstar.com or contact us at info@dbrsmorningstar.com.

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