OREANDA-NEWS. Fitch Ratings says in a new report that regulation and taxation are key differentiators of EMEA regulated networks' credit metrics.

Regulation affects a network's funds from operations (FFO), notably through the allowed return on the regulatory asset base (RAB) - generally referred to as the weighted average cost of capital (WACC) and the regulatory depreciation period. Tax paid also influences FFO evolution, particularly if not fully recognised in allowed revenues. All three combine to influence a regulated network utility's FFO (plus net interest) generation given its RAB.

A company with a strong position in all three drivers will have a lower FFO net adjusted leverage position given a certain level of net debt-to-RAB and vice versa. Breaching rating guidelines on one metric may not lead to a rating downgrade, depending on the relative strength of the other core ratios.

In analysing our rated regulated network utilities, we observe that they often have mixed profiles - composed of both positive and negative positioning on the identified FFO drivers. There are, however, also cases in which the overall positioning is biased towards the stronger or weaker end, explaining the diverging levels of FFO net adjusted leverage and net-debt-to-RAB ratios across the sector. Some companies may have fairly high FFO net adjusted leverage but a conservative net-debt-to-RAB ratio (when compared to the respective rating level) or vice versa, as the same amount of RAB can generate different levels of FFO (plus net interest).

Other factors such as the cash generated by non-regulated activities, the efficiency of the cost structure (and the related profit-sharing mechanisms) and the impact of cash provisions could also influence the FFO net adjusted leverage of regulated networks, given a certain amount of net debt and RAB. However, we expect that these items should explain a diverging trend of the two ratios only in rare cases for most regulated network operators.