ERG S.P.A.
Fitch Ratings has affirmed Italian renewables generation company
The Outlook on the Long-Term IDR is Stable.
The affirmation reflects ERG's visible cash flow generation from its largely long-term incentivised and contracted clean-energy production, its progressive diversification in mature European markets, including
Fitch expects significant net leverage headroom in 2023-2024 to structurally reduce in 2025-2026, as ERG deploys investment to boost installed capacity to its targeted 4.6GW by 2026.
Key Rating Drivers
Solid Cash Flow Visibility: Fitch estimates that more than 85% of ERG's EBITDA for 2023-2026 is incentivised or contracted long-term, resulting in solid operating cash flow visibility. This is further enhanced by a defensive hedging policy and successful working-capital management. The company's strategy to maintain a quasi-regulated profile and its disciplined execution lead us to expect a progressive increase of the average residual lifetime of incentives and power purchase agreements (PPA) to 10 years (currently seven years).
Progressive Re-leverage to Rating Sensitivity: We expect ERG's leverage in 2023-2024 to remain fairly low, due to high energy prices, gradual reinvestments of proceeds from its hydro sale, selective M&As and a stable dividend policy of
Mixed Business Trends: We view ERG as defensively positioned in the current uncertain operating environment that is characterised by all-time high energy price volatility and substantial regulatory risk. This is aided by its asset diversification, multiple growth options (proprietary development, co-development, repowering, M&As) and routes to market (PPA, incentives auction), as well as limited merchant exposure.
We expect the current high energy prices to translate into gradually higher incentives and PPA reference prices, counterbalancing the increasing cost of energy production. In
Visible Pipeline: We view ERG's growth trajectory as fairly visible as more than 50% of its additional 1.7GW capacity is already under construction or completed, or relates to repowering projects or proprietary greenfield projects over a much wider pipeline of around 3.8GW. The remaining 45% (ie cumulative 0.76GW in four years) pertains to bolt-on M&As, for which ERG has a record of delivering sound performance against its targets, while remaining disciplined in its acquisition valuations.
Rising Capex: Our rating case includes total growth capex of
Difficult Execution of CCGT Disposal: ERG has continued to express its commitment to the disposal of its CCGT assets, which has once been denied for antitrust reasons. We believe the catalyst for such a disposal would be positive developments over the future ownership of its key customer, the Priolo refinery ISAB. We believe that ERG would have room to absorb material delays in the sale given its current low indebtedness and the modular nature of its investment plan. Moreover, we expect such assets to generate positive free cash flow (FCF) in 2023, pending their disposal.
No Impact from Parent Developments: Under our Parent and Subsidiary Linkage Criteria we continue to rate ERG on a standalone basis in light of its 'insulated' access and control and legal ringfencing from the ultimate parent
We understand from management that the shareholders share ERG's strategic vision in maintaining a very large share of incentivised/contracted EBITDA in the long term.
Derivation Summary
ERG (BBB-/Stable) is rated at the same level as
ERG is rated two notches below the global offshore wind leader
ERG is rated lower than Italian peer
Key Assumptions
Volumes for 2023-2026 based on historical averages and P50 energy production analysis
Italian pool prices at around
Cash tax rate at around 22% of pre-tax income
Clawbacks and windfall taxes as per management's guidance
Net cash in from CCGT disposal in 2023
Maintenance capex on current assets at around
Investments for growth (development, M&A and repowering & re-blading) of almost
Further M&A at a generic enterprise value 12.5x EBITDA until 2026 (cash payment included in
Dividends near
RATING SENSITIVITIES
Factors That Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade:
An upgrade is unlikely, as we expect FFO net leverage to be in line with our negative sensitivity from 2025 and beyond. However, FFO net leverage below 3.6x on a sustained basis, assuming a broadly unchanged business mix (ie around 90% of EBITDA from incentivised or contracted production), may lead to a positive rating action
Factors That Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade:
Medium-term FFO net leverage trending above 4.4x and FFO interest cover below 4x, for instance, as a result of a lack of mitigating actions from management amid high capex/M&A and rising leverage
Failure to achieve across the investment horizon a business mix with quasi-regulated activities structurally representing at least 80% of EBITDA could lead to a tightening of rating sensitivities
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
Solid Liquidity: At end-2022, ERG had cash & equivalents of around
Issuer Profile
ERG is an independent renewables producer in
Criteria Variation
Fitch views the provisions of the shareholder agreement related to the veto right of IFM for transactions potentially resulting in sub-investment grade rating at ERG as equivalent to an effective ring-fencing documentation in key long-dated financing documents for its Parent and Subsidiary Rating Criteria assessment.
We believe that the interests of such long-term minority equity investor are aligned with that of bondholders in maintaining ERG's rating at investment-grade level. Therefore, we deem the company as insulated from its ultimate parent
Sources of Information
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.
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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