S&P Global Ratings today took the rating actions listed above. Plenitude has leading power and gas retail positioning in Italy but will be short in power generation until 2025.
The group lacks significant scale and diversification, although it benefits from an existing solid competitive advantage thanks to its Italian market position, being the largest gas and second-largest power retail with 7.8 million customers; its 1.4 gigawatt (GW) renewable platform; and its in-house engineering know-how derived from the parent, Eni. We expect retail operations will account for about 85% of the approximately €600 million of reported EBITDA in 2022. The absence of baseload power sources in Plenitude’s power generation mix, given the focus on retail and renewables, exposes the group to the inherent volatility and intermittency of its renewable assets and represents a relative weakness and less robust power natural hedge compared with those of integrated peers. We view as a positive Plenitude’s gas procurement strategy with its parent Eni.
Retail activities are under high political scrutiny given the unprecedented increase in power and gas prices.
The relative concentration in Italian gas retail activities bears some risks given the current energy context. The Italian government has so far announced measures to reduce the impact on customers of rising bills, with the latest law decree introducing a 10% one-off tax on the extra initial margin incurred over the six months ending March 31, 2022, which Plenitude expects to have an EBITDA impact of €5 million-€7 million. Conversely, we would assume that the Italian government would intervene in case of a severe supply disruption in Europe from the geopolitical situation.
Plenitude’s relevance for Eni’s growth strategy in renewables translates into three notches of uplift to the rating.
We assess Plenitude as a strategically important entity for the Eni group. This reflects the importance to the group of Plenitude’s strategy, as the group plans to expand and diversify its activities in the renewable energy segment and in lower-risk countries in Europe. We also take into account the importance of Plenitude’s strategic plan for Eni’s cost of debt. In particular, the first key performance indicator in Eni’s green financing is renewables installed capacity (for both bonds and the renewable credit facility [RCF]). This means that Eni’s cost of debt will ultimately depend upon Plenitude’s capacity to achieve its renewables installation targets. Eni has a commitment to retain full control of Plenitude, with a stake that will not go below 75% following the IPO. Our view is that Plenitude is comparatively more important to Eni than other Eni’s subsidiaries, notably Saipem (BB/Positive/–) and Var Energy (BBB/Stable/–), which we assess as moderately strategic.
Plenitude wants to increase its renewables installed capacity to more than 6.0 GW in 2025 compared with 1.4 GW today, which is subject to execution risk.
The company’s business model should strengthen if it achieves its ambitious strategic plan of tripling its renewable installed capacity by 2025 and increasing its geographic diversity. Plenitude also aims to become neutral in terms of power production in 2025 (total electricity from renewables should be almost equivalent to the electricity sold to retail clients). It has 1.4 GW of capacity installed (mostly solar PV and onshore wind) but has a substantial pipeline of more than 10 GW, which the company can use toward its target of more than 6 GW renewable capacity in 2025 and 15 GW in 2030. Capacity expansion is threatened by challenging conditions for renewables, exposed to commodity prices cost inflation and potential delays in the completion of renewables plants, especially due to permitting issues. In addition, we expect the group’s earnings to be more predictable with an increase of contracted renewable earnings. Earnings should remain somewhat volatile (driven mostly by retail) until generation from renewables pick up starting from 2023. In 2025, we expect about 25% of total EBITDA will stem from renewables power, from 15% in 2022. In fact, of the new and existing renewables capacity, a maximum 20%-30% will be purely merchant, while the remaining contracted through power purchase agreements (PPAs) or other forms of incentives.
High renewables ambitions will translate into sustained investments over 2022-2025.
Plenitude plans to invest about €6.0 billion of capital expenditure (capex) in that time. We expect adjusted EBITDA to increase to about €1.2 billion in 2025 compared with about €600 million expected for 2022. Relatively high capex, averaging almost €1.5 billion per year (more than 70% of which will be dedicated to growth in renewables), coupled with average annual dividends of about €50 million from 2023 onward, will result in negative free cash flow after capex and dividends of about €800 million per year over 2022-2025. This will lead to adjusted debt increasing to more than €3.0 billion in 2025 compared with about €2.0 billion in 2022. We expect credit metrics to worsen over 2022-2023 as Plenitude will not immediately benefit from increasing EBITDA contribution from renewables, with adjusted FFO to debt expected to decline to about 22% in 2023 from about 25% in 2022. From 2024, adjusted EBITDA growth, mostly from renewables, will drive credit metrics improvement, with adjusted FFO to debt expected to increase to about 27% in 2024 and about 30% in 2025.
The preliminary ratings are based on information as of April 28, 2022.
Subsequent information may result in the assignment of final ratings that differ from the preliminary ratings.
The stable outlook reflects our expectation that Plenitude will build on its solid initial competitive advantage in retail activities and renewable energy generation while posting FFO to debt at about 25% over the medium term. Our stable outlook also rests on the assumption that the company will remain a strategically important entity to the wider Eni group and that it will maintain a supportive liquidity position.
We could revise downward the SACP and lower the rating of Plenitude by one notch if any or a combination of the following occur:
•S&P Global Ratings’ adjusted FFO to debt were to decline below 20% for a prolonged period.
•Plenitude were to suffer material cost overrun on its ambitious renewable energy capacity buildup, due to slow permitting, supply chain delays or cost inflation.
•Financial policy were to become less credit friendly, with increased dividends or debt-financed acquisitions which could lead to a buildup of leverage beyond our expectations.
Because we consider Plenitude a strategically important entity to parent Eni, we cap the rating on it at one notch below the rating on its parent. Therefore, if we were to downgrade Eni, we would not take a similar action on Plenitude.
Upside for Plenitude’s SACP would require any or a combination of the following:
•Plenitude achieves its renewables’ growth plan, with notably more than 6 GW of solar and wind installed in 2025.
•S&P Global Ratings’ adjusted FFO to debt increased to above 30% sustainably;
•Financial policy supports a deleveraging path.
An upward revision to Plenitude’s SACP would result in a higher rating if the rating on Eni remains unchanged or improve, and the assessment of Plenitude’s role within the Eni group stays the same.
ESG credit indicators: E-2, S-3, G-2
Social factors have a moderately negative influence on our credit rating analysis of Plenitude. Given the extremely high power and gas prices, political scrutiny on gas and power retail is very high in Europe, in particular Italy. We consider affordability pressures could intensify and result in more negative regulatory measures for the company, hurting its Italian retail activities in both gas and power and leading to extra working capital outflows and potential taxation of windfall profits in its expanding power generation business.
Environmental and governance factors have an overall neutral influence in our analysis. In the generation segment, the company has a low carbon footprint, with the entirety of its 1.4 GW portfolio consisting of renewable generation sources, notably solar PV and onshore wind. Plenitude plans to become net zero by 2030 in the power segment and by 2040 in the gas segment.