S&P placed Elenia Verkko Oyj’s issue rating on CreditWatch negative

S&P Global Ratings (S&P) has maintained the BBB+ issue rating of Elenia Verkko Oyj but placed the rating on CreditWatch negative. S&P sees that the regulatory environment for distribution system operators (DSOs) in Finland has weakened as a result of significant changes to the framework in the middle of the regulatory period.

Elenia’s credit rating has been underpinned by the stable and predictable Finnish regulatory framework. The Electricity Market Act amendment was approved by the Parliament in June 2021 followed by the Energy Authority (EA) publishing explanatory notes in October 2021 on the proposed changes to the regulatory methods for the current regulatory period. The changes include an update to the unit prices underlying the regulatory asset base, an update to the determination of the reasonable rate of return by changing the calculation of risk-free rate, and the removal of the security of supply incentive. The changes will become effective on 1 Jan 2022 and will be applied for 2022-2023.  

The EA estimates that the regulatory asset value of the electricity distribution network for an individual network owner decreases by an average of about 15%, but the decline can be up to 22% for some of the DSOs. As other WACC parameters remain unchanged, the EA’s assessment of the reasonable rate of return for 2022 is 3.97%. The final regulatory methods and company specific regulatory decisions are expected to be published by the EA in December 2021.

It is highly unusual in established western democracies for the regulatory framework to be amended in the middle of the regulatory period. Elenia shares S&P’s view that changes to the previously confirmed regulatory methods for the current regulatory period will reduce the predictability and stability of the Finnish regulatory framework and undermine its credibility. Consequently, S&P has reduced their assessment of the regulatory regime to strong / adequate. Elenia is assessing the financial impact of the upcoming changes, and also the potential impact that the changes could have on our operations and the roll-out of our capex programme.

The report can be found at www.elenia.fi/en/investors/credit-ratings