REN-Redes Energeticas Nacionais SGPS S.A.

The stable outlook indicates our view that supportive regulation in Portugal will shield the company from the effects of high inflation and rising interest rates. We expect volatile credit ratios due to the tariff deviation, but that FFO to debt will remain comfortably above 12% for the next two-to-three years. We could lower the rating if REN failed to maintain adjusted FFO to debt above 12% on average. This could occur if profitability were lower than expected; it made more-aggressive dividend distributions or acquisitions; or there were major negative regulatory developments. We consider all these scenarios to be unlikely. Any signs of deterioration in the political or financial environment could also lead us to lower the rating. If we lowered

...REN-Redes Energeticas Nacionais SGPS S.A.'s regulated cash flows are protected from inflation and volume risk by Portugal's supportive regulatory framework. S&P Global Ratings regards the Portuguese regulator, Energy Services Regulatory Authority (ERSE), as having a solid and stable record. REN's activities are also supported by the EU's supervisory framework. For gas transmission and distribution activities, we think the Portuguese regulated framework adequately protects REN's cash flows from the possibility of a downturn. We currently forecast GDP growth in Portugal of 2.4% in 2023 and 4.0% in 2024, but consider the wider environment to be recessionary. Under the regulatory framework, the company does not bear volume risk, and the base rate of return is adjusted annually in line with the yield on 10-year Portuguese government bonds. Therefore, we expect the rate of return to increase to close to 4.85% at high pressure and to 5.05% at medium and low pressure by 2023, from 4.52% and 4.72%,...

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