Fitch Ratings has affirmed
The Outlook is Stable.
The affirmation reflects EDP's steady credit profile under its recently updated strategic plan as well as our expectation that leverage will remain consistent with the 'BBB' rating in the medium term. The new strategic plan entails higher execution risk, including more ambitious renewable capacity deployment targets, but we believe this is balanced by credit-protection measures, a reduced exposure to emerging markets, and a lower contribution from thermal generation.
The Stable Outlook reflects Fitch's forecast that funds from operations (FFO) net leverage will average at 4.4x through to 2026, leaving moderate headroom under our negative rating sensitivity of 4.7x.
Key Rating Drivers
Updated Strategic Plan: EDP presented its 2023-2026 strategic plan in
High Capex Cycle in Renewables: The strategic plan includes the deployment of 17GW until 2026, and the disposal of 5GW compared with the current capacity of 15GW under
Visibility on the capex plan comes from around 40% of it being already secured by power purchasing agreement or price-support mechanisms, including contracts for difference and feed-in tariffs. The remaining 60% is backed by a renewables pipeline of around 74GW as at end-2022. Delays to project authorisations and persistent supply-chain challenges remain as the key execution risks.
Balanced Funding Mix: The strategic plan is funded by a combination of organic cash flow, new debt, fresh capital, disposals and tax equity partnerships. EDP has a record of tapping into various funding sources across the cycle; for example, the recent hybrid refinancing and capital increases at EDP and EDPR totaling
Unchanged Credit Profile: We expect EDP's share of regulated earnings to remain close to 30% over 2023-2026, reflecting a credit profile that is less regulated than that of most integrated utility peers in
EDP aims to reduce its presence in
Rating a
Manageable Regulatory Uncertainty: Regulatory uncertainty in the European energy market continues to impact companies with windfall taxes. Similar mechanisms are also being implemented differently across jurisdictions. We forecast a flat amount of windfall tax and clawbacks, despite decreasing energy prices, to capture this regulatory risk.
Positive Financial Performance: Financial performance for 2022 was much better than guidance communicated in 3Q22, due to an exceptional fourth quarter for hydro generation in Iberia and still-healthy yet decreasing price environment. The lower generation in hydro was partially compensated by higher thermal generation. EDP closed the 2022 year with FFO net leverage of 4.1x, against Fitch's positive sensitivity of 4.0x.
Asset Rotation Model: The proceeds from the asset-rotation plan primarily relate to the sale of around 5GW of wind and solar capacity for about
Derivation Summary
EDP is a vertically integrated utility and the incumbent in
EDP benefits from a higher share of long-term contracted and incentivised renewables business, which results in a regulated plus long-term contracted share, excluding asset-rotation capital gains, of about 80% of total EBITDA in the medium term.
EDP's higher business risk justifies the one-notch rating differential with
We do not apply the one-notch uplift to EDP's senior unsecured rating, as the company's fully regulated EBITDA share is below 50% (or below 40% regulated plus 10% of contribution from renewables).
Key Assumptions
Our Key Assumptions within our Rating Case for the Issuer:
12GW of net renewable capacity additions, in line with the strategic plan, including 5GW of asset rotation
Wind and solar generation increasing to 65 terawatt hours (TWh) in 2026, from 33TWh in 2022, with the selling price averaging at
Hydro generation in Iberia averaging at 10TWh a year, with achieved prices tracking current OMIP futures for baseload energy
Hydro generation in
Stable thermal generation margin in Iberia, with no coal generation by end-2025, and gas generation decreasing by 20% annually and trending towards 3TWh by 2026
Electricity supply, excluding solar distributed generation, decreasing by 2% annually towards 32TWh, with stable gas supply at 7TWh, while the margin per TWh falls by 2% on a yearly basis
The regulated asset base in Iberia and
Effective interest rate averaging at 4.4%, with and effective tax rate of 24%
Dividends in line with the communicated dividend floor of
Working capital outflow averaging
Capex averaging at
Tax equity proceeds averaging at
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Improvement of the business mix towards a higher weight in regulated activities.
FFO net leverage below 4.0x and FFO interest coverage above 4.6x on a sustained basis, assuming no major changes in activity mix other than that expected by Fitch.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
FFO net leverage above 4.7x and FFO interest coverage below 4.1x for a sustained period, for example, as a result of delays in asset rotation.
Evolution of the business mix towards higher-risk activities or countries could weaken EDP's debt capacity.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Adequate Liquidity: EDP had
Issuer Profile
EDP is the leading integrated utility in
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
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