ITALIAN MULTI-UTILITY HERA SPA UPGRADED TO 'BBB+' ON IMPROVED CREDIT METRICS; OUTLOOK STABLE

Redazione Watergas.it
Aziende e settori industriali

S&P Global Ratings today took the rating actions listed above. Hera reported 2020 results that were above our expectations, demonstrating resilience amid ongoing COVID-19 uncertainty.

Hera SpA has demonstrated resilient operating performance amid a challenging environment related to the COVID-19 pandemic, with 2020 reported EBITDA up 3.5% year-on-year to €1,123 million.
We anticipate adjusted funds from operations (FFO) to debt will hover at about 24% in 2021-2023, spurred by an about 4% EBITDA increase on average per year, which should more than offset additional spending on Hera's strategic plan.
Hera will continue to benefit from predictable cash flows from the high share of fully regulated activities in its 2021-2024 business plan, which will represent about 45% of the earnings mix.
We therefore raised our long-term issuer credit and issue ratings on Hera SpA and its senior unsecured debt to 'BBB+' from 'BBB'.
The stable outlook indicates that we believe Hera SpA will retain credit metrics commensurate with the 'BBB+' rating in the next two years, with FFO to debt averaging 24%, factoring management's strong commitment to this rating level.

These stronger-than-expected results notably stemmed from the robust performance of Hera's network activities and ancillary services, which more than offset declining waste prices due to relatively low hedging amid declining prices and volumes. Reported net debt for 2020 stood at €3,250 million, declining from €3,280 million in 2019, with better-than-expected working capital management throughout the pandemic. This signals the resilient nature of Hera's business, supported by regulated activities, limited exposure to power prices at its waste-to-energy plants, and no direct exposure to generation capacity. Thanks to the strong 2020 results, adjusted FFO to debt including income from clients neared 24%, only marginally lower than the 24.3% registered in 2019. Income from last-resort clients has an about 80 basis points (bps)-100 bps effect on adjusted FFO to debt, depending on its magnitude year from year. This income is derived from interest on delayed payments from public administration authorities in Italy.

Hera's business risk profile continues to benefit from a large share of regulated activities and its diversified portfolio in one of Italy's wealthiest regions, where it holds a dominant market position.

Hera's business risk profile benefits from the significant (about 46% of 2020 EBITDA) contribution from fully regulated water, gas, power distribution and, since 2020, urban waste collection activities under long-term concessions that are remunerated based on national regulatory authority (ARERA) tariffs. Since last year, urban waste collection activities (6% of 2020 EBITDA) are also regulated in Italy with a framework like that for gas distribution, which further improves cash flow stability and visibility for Hera's core waste operations. We expect fully regulated activities to remain about 50% of total EBITDA at the end of Hera's 2021-2024 business plan. This stems from sizable investments in networks, which will represent about 65% of total investments, with waste collection and recycling representing more than 20%. The remainder will be invested in retail activities and ancillary services (such as public lighting and energy management). About 17% of EBITDA comes from stable waste treatment activities focused in northern Italy. More volatile earnings come from energy, including retail power and gas supply activities, which account for 33% of 2020 EBITDA. Other services, including public lighting and telecommunication, account for 3%.

Organic growth and strong cash flow will lead to improved credit metrics over 2021-2023 despite capital expenditure (capex) acceleration.

Under its strategic plan to 2024, Hera plans to invest on aggregate €3.2 billion, 40% higher than in the previous five years. We expect a strong EBITDA increase over the period to offset the spending, led primarily by the retail business, which will add about €100 million thanks to the €84 million contribution from the Ascopiave acquisition. This, combined with stable revenue from regulated businesses and growth in merchant activities, will support Hera's adjusted EBITDA growth above €1.2 billion by 2023. Therefore, we expect adjusted FFO to debt (including income from last-resort clients) will consistently hover at about 24% over 2021-2023. The total regulatory asset base (RAB; excluding district heating) should expand at a compound annual growth rate of 2.8% to €3.8 billion in 2024 from €3 billion in 2020. As a result of the higher investments, reported net debt should increase about €400 million by 2024. Nevertheless, we project that adjusted leverage will remain under control at 3.4x-3.5x, thanks to stronger EBITDA growth and healthy operating cash flow.

Hera's prudent financial policy underpins credit metrics improvement and will allow the company to control leverage.

In the past, Hera's strategy was acquisitive, with the last large acquisition that of Ascopiave's gas and power clients in 2019. Although we do not include any large acquisition in our base case up to 2023, we do not exclude that there might be additional opportunities for Hera in the highly fragmented Italian power and gas sector. That said, we believe that such acquisitions will not be detrimental to the rating so long as Hera continues to finance sizable transactions through share swaps, like for Ascopiave, or with additional credit remedy measures. In addition to increased capex, we include in our forecasts a stable cash dividend of €210 million on average over 2021-2023, working capital outflows related to concessions and tenders, and delayed payments from clients. Even after considering all of this, Hera will still be able to generate positive free operating cash flow (FOCF) of €100 million-€150 million per year over 2021-2023.

The stable outlook reflects our expectation that Hera will maintain adjusted FFO to debt (including income from last-resort clients) at or above 24% over 2021-2023. We also take into account management's commitment to the 'BBB+' rating, with our understanding the company is willing to adjust financial policy should credit metrics deteriorate close to the rating thresholds. Our stable outlook also factors in Hera's timely execution of the strategic plan.

We could downgrade Hera if FFO to debt (including income from last-resort clients) falls below 23% over a prolonged period. This could happen if:

Hera undertakes larger cash acquisitions or increases its dividend, deviating from what we would view as a prudent financial policy;
Hera does not successfully implement its strategic plan until 2024; or
Changes in the regulatory framework for Hera's network business (water, gas, and electricity) impede its ability to achieve EBITDA targets.

The rating could face pressure if the economic environment in Italy turns more negative, thereby constraining Hera's growth strategy and EBITDA. We would also revise the outlook to negative if we take a similar action on Italy (unsolicited; BBB/Stable/A-2), because we cap our rating on Hera at one notch above the sovereign rating.

Although unlikely at this stage, we could revise our stand-alone credit profile for Hera upward if it strengthens its credit metrics and achieves adjusted FFO to debt (including income from last-resort clients) at or above 30% on a sustainable basis.

An upgrade would also depend on our unsolicited rating on Italy. Given Hera's sensitivity to the Italian economy, we allow the long-term rating to be only one notch higher than our long-term sovereign rating.

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