Fitch Confirms Engie S.A.’s ‘A-‘ Grade; Predicts Steady Outlook

Fitch Ratings, from their Barcelona office on 18 July 2023, has reaffirmed the Long-Term Issuer Default Rating (IDR) and senior unsecured rating of Engie S.A. at ‘A-‘. This verdict also includes a Stable Outlook for the long-term IDR. This announcement includes a comprehensive list of rating actions.

This decision is predicated on Engie’s resilient business structure, characterized by large-scale operations and extensive diversification. The company has a substantial proportion of regulated, quasi-regulated or contracted EBITDA, which bolsters its cash flow predictability. Furthermore, Engie’s focus on low-carbon power generation, along with its investment plan targeting energy transition and maintaining economic net debt up to 4.0x EBITDA, aligns with the rating sensitivities currently in place.

Engie has recently entered into an agreement with the Belgian government, extending the lifespan of two nuclear reactors. While this agreement reduces the company’s rating headroom, it concurrently eliminates uncertainties surrounding future changes in nuclear waste provisions.

Fitch’s Stable Outlook is founded on its expectation that Engie’s credit metrics will persist within rating sensitivities for the period of 2023-2025. However, no additional rating headroom is anticipated from 2024 onward.

Key Influencing Factors: The expected average for nuclear-adjusted funds from operations (FFO) net leverage during 2023-2025 has been identified as 3.7x, an increase from 3x in 2022. This change is largely driven by a significant capex plan and additional cash payments concerning nuclear waste liabilities, in line with the recent agreement with the Belgian government. Fitch’s rating case generally aligns with management’s predictions but assumes conservative EBITDA forecasts due to volatility in power prices.

Significant Expansion in Capex: Engie’s business plan for 2023-2025 earmarks EUR22 billion-EUR25 billion for growth capex, a significant increase from the EUR15 billion-EUR16 billion designated in the 2021-2023 plan. Most of these funds are slated for the growth of renewable capacity (55%-65%), with a goal to augment installed renewable capacity from 38GW at the end of 2022 to 50GW by 2025. This expansion will mainly be achieved through investments in onshore and offshore wind and solar, with largely predictable and contracted earnings.

The remaining budget will be allocated to networks, infrastructure assets, and flexible generation. Around 75% of growth capex is expected to align with the EU’s taxonomy for climate change mitigation.

Transfer of Nuclear Waste Liabilities: Engie’s transfer of EUR15 billion of nuclear waste provisions to the Belgian state will cover all existing and future nuclear waste liabilities. This agreement will lead to additional cash outflows of around EUR5 billion in 2024-2025, factored in before free cash flow (FCF). On the positive side, Engie will no longer bear the liability for nuclear waste storage within its Belgian fleet. By the end of 2025, Engie is expected to halt its nuclear production in Belgium, apart from units within its joint venture (JV) with the Belgian state.

Nuclear Lifetime Extension: Engie declared an interim agreement with the Belgian government in June 2023 to extend the lifespan of Doel 4 and Tihange 3 nuclear units to 2035. Both units will be incorporated into the JV, which is jointly owned by the Belgian state and Engie. This strategy limits operational risks for the group. The terms for the contract-for-difference mechanism and performance-linked incentives for the plants are yet to be defined. The extension capex, estimated at EUR1.6 billion-EUR2 billion, will be equally funded by Engie and the government.

Balanced Business Mix: By 2025, the share of regulated, quasi-regulated, or contracted EBITDA is expected to moderately increase to 70% from around 63% in 2022. Engie’s plan to expedite growth in renewables and infrastructure assets, with largely predictable cash flows, aligns with the group’s increasing focus on energy transition and should make the business mix more similar to its peers.

Conservative Financial Policy: Engie plans to predominantly fund its capex plan and dividends through operating cash flow and asset sales, with an aim to maintain a robust balance sheet. It continues to target an economic net debt-to-EBITDA ratio of up to 4x over the long term, which is consistent with Fitch’s sensitivities for the rating.

Impressive Performance in Q1 2023: Engie reported impressive results for Q1 2023, with organic growth of 16% in reported EBITDA, driven mainly by global energy management & sales (GEMS) and renewables due to a mix of higher commodity prices or higher volumes. However, this was partially offset by the company’s retail and nuclear businesses, owing to lower prices as a result of market normalization for the first, and lower volumes and windfall taxes for the second. Engie recently revised its 2023 EBITDA indicative range (excluding nuclear) upwards by EUR2 billion to EUR12.9 billion-EUR13.9 billion, reflecting strong performance in April and May 2023.