Fitch Ratings has revised
A full list of rating actions is detailed below.
The revision of the Outlook reflects our view that Acea's higher-than-expected leverage will persist in 2023, due to sizeable working-capital drain and investment acceleration. We expect the group's industrial plan to clarify their structural leverage tolerance (reported net debt / EBITDA of 3.0x is the historical target communicated by the group) and their strategic ambitions, which will provide key inputs for the rating trend.
The rating mainly reflects the largely regulated nature of Acea's cash flows, its solid operational performance and increasing capex needs.
Our projections do not factor in the potential realisation of the large waste-to-energy plant serving the
Key Rating Drivers
Leverage Breach: Fitch estimates Acea's funds from operations (FFO) net leverage in 2022 to have slightly breached its 5.0x negative sensitivity. We now expect the breach will continue this year, after management guidance for 2023 points to a net leverage increase to levels that would not be consistent with 'BBB+' and with the reported 3.0x net debt/EBITDA embedded in Acea's historical target.
Long-Term Business Plan Key: We view management's estimate for 2023 as prudent, which is based on an overall adverse energy scenario, without fully considering potential extraordinary measures to mitigate an expected negative free cash flow (FCF) of around
Rising Net Debt: Under our updated projections, Fitch-defined EBITDA is unchanged at
Solid Operating Performance: Acea's EBITDA was solid in 2022, with almost all divisions marking a year-on-year increase, denoting strong resilience in a very volatile energy environment. Even for 2023, management are targeting another 2%-4% increase, which we deem achievable. However, FCF generation was negative at more than
Standalone GRE Rating Drivers: Fitch views Acea as a government-related entity (GRE) under its criteria, given the
Limitations of Shareholder Links: We continue to assess Acea at its 'bbb+' Standalone Credit Profile (SCP) level, reflecting also our assessment of 'insulated' access and control by the parent based on Acea's public listing status, the presence of strong minority shareholders and negligible financial integration with
Derivation Summary
Acea has a better business profile than other Fitch-rated Italian multi-utilities such as
In comparison with pure international water network peers such the
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer:
EBITDA of grid and water divisions to rise to almost
Energy division's EBITDA to progressively increase to
Doubling of EBITDA contribution from the environment-services division by end of the business plan (around
Working-capital outflow in 2023 of around
Capex and selected acquisitions for
Cumulative dividends of more than
Economics of the potential new waste-to-energy plant of
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Due to the Negative Outlook, an upgrade of Acea is unlikely. Furthermore, upside is constrained by our view of the creditworthiness of the
We would revise the Outlook to Stable if the new business plan points towards credible deleveraging, with FFO net leverage falling below 5.0x on a sustained basis, and/or towards a visible improvement of Acea's business profile
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Failure to reduce FFO net leverage to 5.0x or below by end-2024, or to maintain FFO interest cover above 3.5x on a sustained basis
A shift in the activity mix towards unregulated, undermining the predictability of cash flows
Deterioration, in our view, of the creditworthiness of the
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: At end-2022, cash and cash equivalents amounted to slightly more than
Issuer Profile
Acea is one of the largest Italian multi-utilities by revenue. It predominantly operates in the urban area of
Criteria Variation
Fitch views the contractor business of Italian utilities in the context of approved eco-bonus on the energy requalification of buildings as a pass-through item. This is mainly due to a clear recovery framework through tax credits in the following years. In light of their presence in Acea's business plan, we reverse the impact on leverage metrics caused by related investments/working-capital drains.
The one-notch uplift for higher expected recoveries on senior unsecured debt instruments issued by regulated utilities has not been applied to Acea as this would have resulted in the instrument rating exceeding
Rating the utility's unsecured debt instruments above the sovereign IDR would suggest that recoveries would remain above average even in the context of a highly depressed sovereign environment. Fitch believes however that higher rates of recoveries for utilities' senior debt are less predictable in a weaker sovereign environment than in an idiosyncratic default of any single utility, making the standard uplift not appropriate in this case.
Summary of Financial Adjustments
Factoring related to securitization, receivables sale and reverse factoring are added to debt
Short-term deposits are added to cash & cash equivalent
Third-party net income attributable to
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
Acea has an ESG Relevance Score of '4' for group and governance structure, reflecting large third-party minority rights in the water business and potential intervention from majority shareholder, respectively. These, together with the weaker creditworthiness of the
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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