- Edison reported solid operating results during first-quarter 2021, following improvement of its credit metrics in 2020 thanks to successful disposal of its exploration and production (E&P) business and resilient performance. - We expect the company's EBITDA and credit measures will continue to improve in 2021 and thereafter be supported by the newly consolidated renewable generation fleet, rising revenue contribution and margins from the existing and new thermal fleet, and ongoing macroeconomic recovery. - We anticipate adjusted funds from operations (FFO) to debt will stay above 45% in 2021-2023, assuming EBITDA increases by about 6% on average per year, which should more than offset additional spending on Edison's strategic plan. - We therefore raised our long- and short-term ratings on Edison to 'BBB/A-2' from 'BBB-/A-3'. - The stable outlook indicates that we believe Edison can maintain credit metrics commensurate with the 'BBB' rating in the next two years, with FFO to debt averaging 48%, factoring in the company's rising contracted cash flows and prudent risk management. - S&P Global Ratings today took the rating actions listed above.
Edison's first-quarter 2021 results confirm the strong resilience of its cash flows and improved credit metrics.
The improvement in Edison's credit ratios stems from better-than-expected 2020 results and disposals of nonstrategic assets. Edison has demonstrated robust operating performance amid a challenging environment related to the COVID-19 pandemic, with reported EBITDA up 13.6% in 2020 year-on-year to €684 million. This figure exceeded our expectations and reflected the limited impact from COVID-19 of about €60 million, higher EBITDA from integrating EDF's Italian renewable activities, recovery of demand and prices, good portfolio optimization following gas contract renegotiations, and protection of ratios from naturally hedged positions in gas generation and supply. This resulted in FFO to debt of 48% and debt to EBITDA of 1.9x in 2020. Results in the first quarter of this year mirrored the continued recovery of activities, leading Edison to revise its 2021 EBITDA guidance upward to €710 million-€770 million. We have revised our EBITDA forecast for 2021 to about €730 million, owing to the improved macroeconomic environment, higher thermoelectric generation volumes and spreads, and larger installed capacity for wind as a result of EDF Renewables Italia being integrated in 2019. We now expect FFO to debt to stay above our rating threshold of 45% over 2021-2023.
Edison's latest disposals add clarity to its strategic plan and accelerated deleveraging.
In 2020, Edison closed the sale of its Mediterranean and U.K. E&P business, which helped it reduce net financial debt by about €200 million. Proceeds from the sale of the Norwegian E&P assets reduced net financial debt by €264 million in 2021. Our adjustment to net debt already factors in a €400 million reduction of asset-retirement obligations linked to these activities by in 2019 compared to the 2018 level. These disposals also bring more clarity to Edison's transition away from gas upstream activities. We exclude the sale of the Algerian assets, considered less liquid than the Norwegian ones, from our base case.
We view favorably Edison's strategy to exit the more volatile, highly capital-intensive E&P business to focus on expanding its long-term contracted renewables generation and downstream operations.
The disposals will partly finance the €500 million-€600 million per year of investments expected over 2021-2023. These investments will support Edison's shift to more contracted and downstream activities. It has plans for capital expenditure (capex) on renewables and new combined cycle gas turbines (CCGTs), as well as downstream retail activities and some small acquisitions. On top of investments, we expect about €180 million of working capital outflows in 2021 due to payment in advance of gas linked to the Libyan take-or-pay gas contract that will reduce gradually over 2022-2023. The company's performance and increasing net income should lead to a resumption of dividend distributions to its shareholders. Even though Edison has no public dividend policy, we believe our assumption of a 50% payout ratio reflects the ongoing support to the company's growth plan. This translates into our estimate of potential dividend outflows of €100 million-€150 million per year from 2022. As a result, we estimate S&P Global Ratings-adjusted net debt at €600 million-€700 million (including IFRS 16 leases) and adjusted net debt at €1.3 billion-€1.4 billion over 2021-2023. Our adjusted debt figure comprises significant nonfinancial debt elements, including provisions for pensions, litigation, and guarantees (about €200 million); asset-retirement obligations from generation assets (about €140 million); and consolidation of trade receivables sold (about €420 million).
We view Edison's derisking of its business mix as positive, since this should support sustained EBITDA growth over 2021-2023.
Edison's focus on long-term contracted renewables and downstream businesses through its investment plan is positive, in our view. In 2019, it expanded its renewables perimeter, becoming the second largest wind operator in Italy and laying foundations for involvement in the photovoltaic sector. Edison's smaller size after disposing of the E&P activities were compensated by the full-year integration of the former EDF Energies Nouvelles' Italian renewables operations in 2020 and positive growth trends in other businesses. EBITDA reached €684 million in 2020 after about €587 million in 2019 and €793 million in 2018 (including E&P). The company targets 1.3 gigawatt (GW) of wind and solar capacity in 2023, up from about 1.0 GW in 2019. This should contribute to EBITDA growth of about 10% while the expansion of downstream activities in energy services and retail should bring an additional 20% of EBITDA growth.
EBITDA growth should also stem from the increase of Edison's thermal contracted fleet.
The construction of two efficient CCGTs, Marghera Levante and Presenzano, started last year. These plants will require investments of about €700 million over 2020-2023 and benefit from a capacity mechanism of €75 per kilowatt for 15 years from the date of commissioning, planned for 2022 and 2023. We expect the capacity payments, additional gas-based electricity production, and improved margins to contribute to EBITDA growth of 60% by 2023. Thermal power production margins are partly protected by fleet management and volumes flexibility within its portfolio gas contracts, the latter being index-linked to commodity prices.
We note that Edison remains highly exposed to gas and merchant activities compared to main European peers.
We estimate that, by 2023, about 60% of Edison's operations will be purely merchant business, with exposure to power and gas prices. The EBITDA contribution of contracted activities will increase to about 40% (all of wind and solar, and about 30% of its thermal generation) based on our estimates. Downside risk could come from lower availability of the generation fleet, delays in the development of the generation fleet, and intense competition in the retail market with a loss of market shares. Edison's business mix is skewed toward gas and exposed only to Italy, but with a limited size compared with peers like Engie or Eneco Beheer.
The stable outlook reflects our expectation that Edison will maintain FFO to debt higher than 45% based on the increasing generation asset base, namely renewables and CCGTs, development of energy services, strong position in Italian gas market, some degree of vertical integration, and the increasing share of contracted activities within its business mix. We expect Edison to generate substantial free cash flow from 2022, which will cover investments and dividend payments.
We foresee some rating pressure if Edison fails to sustain FFO to debt above 45%, namely if:
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Earnings weaken substantially, for example because 2021 and 2022 earnings are hit by poor market or hydrological conditions, or by delays in capacity increases of renewables or new thermal generation. |
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Debt-funded acquisitions increase significantly, combined with generous dividend payouts without any remedy measures, leading us to reassess the group's financial policy. |
We see an upgrade as unlikely, however we could take a positive rating action if Edison:
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Demonstrates an improvement of its business model with an increased share of regulated or long-term contracted activities; and |
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Announced a public financial policy with a clear commitment to a certain level of creditworthiness. |
We assess Edison as highly strategic to EDF because Italy is a key market for EDF and we assume Edison will act as a core platform for EDF to develop that market. Edison is fully integrated into the group and depends on EDF strategically, managerially, and financially. Under its current stand-alone credit profile (SACP) of 'bbb', Edison does not benefit from any rating upside from its parent. Conversely, the long-term rating on Edison is not capped by our assessment of EDF's SACP at 'bb+', but rather by our 'BBB+' long-term rating on EDF.
Related Criteria
Related Research
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Italy Ratings Affirmed At 'BBB/A-2'; Outlook Stable, April 23, 2021 |
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Italian Utility Edison SpA Outlook Revised To Positive On Improved Credit Metrics; 'BBB-/A-3' Ratings Affirmed, Jan. 22, 2021 |
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French Utility EDF Downgraded To 'BBB+' On Prolonged Operational Weakness, Lower Output Due To COVID-19; Outlook Stable, June 22, 2020 |
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