Fitch Ratings has affirmed Energia Group Limited's Long-Term Issuer Default Rating (IDR) at 'BB-'.

The Outlook is Stable. A full list of ratings is detailed below.

The rating affirmation reflects Energia Group's solid business mix with high levels of cash flow visibility driven by the combination of capacity auctions, renewables support schemes, power procurement at Ballylumford and its regulated supply business in Northern Ireland (NI). As an integrated generator and energy supply provider, Energia Group has seen its generation business offset negative earnings in the energy supply business due to the high energy price environment.

The Stable Outlook reflects our expectations that Energia Group will maintain a capital structure with net debt up to 4.0x EBITDA at the restricted group level. Despite the anticipation of high levels of capex related to renewable generation and uncertainty on dividend levels, our rating case reflects a forecast average funds from operations (FFO) net leverage of 4.4x across the rating horizon, consistent with the 'BB-' rating.

Key Rating Drivers

Increasing Capex Intensity: Higher-than-previously forecast capex and fairly weaker customer supply EBITDA increase leverage in the near term. Energia Group has developed 309MW of its own operational onshore windfarms in recent years and it is at various stages of development for a further 267MW of onshore wind projects, 313MW of solar and 50MW of battery storage by FY26 (year-end March). In addition, it is in the development stage for the construction of a data centre adjacent to its Huntstown campus. Energia Group has also received foreshore licences to investigate the feasibility of offshore wind sites in the north Celtic and south Irish seas, which is providing good growth prospects beyond the current forecast period to FY26.

Financial Policy Allows for Growth: The restricted group's operations were highly free cash flow (FCF)-positive in FY22. However, we continue to assume significant growth capex with negligible EBITDA contribution, which should lead to negative FCF to FY26. We also assume the company to maintains net debt at 4.0x EBITDA (restricted group) on average, which is in line with our negative sensitivity for the rating. The ratings could come under pressure if Energia Group is not able to fully hedge against adverse market conditions or if it adopts a more aggressive capex and dividend policy that would increase leverage above this level.

Negative Supply Offsets Improved Generation: Renewables power purchase agreements (PPAs) in FY22 with raised EBITDA levels reflected high weighted market prices. This is forecast to increase in FY23 as the average price across the year rises further before normalising in FY24. The Huntstown flexible generation business also benefits from the higher market prices. Set against this, the customer solutions segment saw negative margins due to high power market prices leading to higher costs.

Huntstown Benefits from Higher Utilisation: Huntstown saw significantly improved EBITDA of EUR104 million for FY22 (EUR62 million in FY21), reflecting high energy prices and high usage. EBITDA margins are anticipated to fall in FY23 as the high gas price relative to coal reduces utilisation. In addition, after suffering a transformer outage at Huntstown 2 in January 2021, which continued into October 2021 Energia Group successfully claimed insurance proceeds in relation to the earnings impact of the outage, offsetting the loss incurred. These were included in Huntstown EBITDA for FY22.

Solid Business Mix: Fitch estimates the share of regulated and quasi-regulated EBITDA of the restricted group to increase significantly early in the forecast period before normalising towards FY26 at around 60%. This is due to the continuing negative impact of higher energy prices on the customer solutions division. The restricted group had on average 58% of regulated and quasi-regulated EBITDA in FY20 and FY21, when including dividends from project subsidiaries. In FY24 the regulated PPB contract will end but this will be offset by forecast higher dividends from the renewables segment, which remain outside of the restricted group.

Potential Windfall Tax Risk Limited: It is Fitch's view that the potential introduction of windfall taxes in NI and Republic of Ireland (RoI) could have a limited effect on Energia Group due to high energy prices having both a negative impact on the customer supply business while having a positive impact on generation. The integrated profile of Energia provides a natural hedge of earnings but also structurally offsets windfall profits for the restricted group.

Derivation Summary

Energia Group has a structurally lower share of contracted earnings than Drax Group Holdings Limited (Drax, BB+/Stable), but it is more integrated and diversified. We allow Energia Group 4.5x FFO net leverage at the 'BB-' level compared with Drax's 2.8x at 'BB+', implying a broadly similar debt capacity for a given rating.

ContourGlobal Plc (BB-/RWN) is a large generation holding company also rated on the basis of a restricted group business and financial profile, and has a slightly higher debt capacity than Energia Group with FFO gross leverage at 4.5x, due to its larger size and greater diversification, partially offset by limited vertical integration.

ContourGlobal's RWN reflects uncertainty around their long-term capital structure and financial policy following the announced acquisition of the company by funds advised by global investment firm Kohlberg Kravis Roberts & Co. Inc. and its affiliates (KKR). This could lead ContourGlobal towards a more aggressive capital structure.

Techem Verwaltungsgesellschaft 674 mbH (B/Stable) has an 8.0x FFO gross leverage sensitivity at its 'B' rating, indicating a higher debt capacity due to its high share of contracted revenue.

Key Assumptions

Fitch's Key Assumptions Within Our Rating Case for the Issuer

Energia Group's customer supply average EBITDA margins of around 0.1% to FY27, based on Fitch assumptions. This will be due to continued deeply negative margins in FY23 following on from FY22 due to high power prices. Supply EBITDA margins to return to around 3.9% as energy prices ease by FY27

Power NI EBITDA margins of around 4% through to FY26 with unchanged regulation for residential supply in NI

Average load factor of 27% for owned wind farms leading to EBITDA margins of around 75% on average through FY22-FY27 with a similar EBITDA trend for the PPA portfolio

Huntstown EBITDA based on existing capacity agreements and management's guidance

Negative working capital as per management forecasts, primarily reflecting the reversal of working-capital timing benefits of FY22 including the payment on account of hedge debtors. Additional outflow during FY23 - FY27 on reversal of over-recovery in relation to the PPB contract in FY21-FY22

Capex of restricted group on average at around EUR75 million per year to FY27, reflecting new growth projects with only limited earnings contribution from growth capex

Dividend pay-outs consistent with below 4.0x net debt / EBITDA target

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

A decrease in restricted group's FFO net leverage to below 3.7x on a sustained basis

A structural decrease in business risk due to higher average contribution from the regulated/contracted generation business

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Large debt-funded expansion or deterioration in operating performance, resulting in restricted group's FFO net leverage above 4.5x and FFO interest cover below 3x on a sustained basis

Reduced share of regulated and quasi-regulated earnings to below 50% leading to a reassessment of maximum debt capacity

A material increase in the super senior revolving credit facility (RCF) could be negative for the senior secured rating

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 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

Sound Liquidity: As at 31 March 2022 Energia Group had EUR369.3 million in available cash and cash equivalents (excluding around EUR53 million of restricted cash). It also has access to EUR109 million of undrawn liquidity on the cash portion of its RCF expiring in June 2024.

Wind-capacity assets and debt financed through project-finance facilities are excluded from our debt calculation as the debt is held outside the restricted group on a non-recourse basis. The restricted group has no imminent short-term debt and its next maturing debt is its GBP225 million senior secured notes due in September 2024, followed by its EUR350 million senior secured notes in September 2025.

Issuer Profile

Energia Group is an integrated electricity generation and supply company operating across NI and ROI. Its generation assets include 309MW of wind assets, 747MW of CCGTs while it further procures power under contract with 600MW in NI.

Summary of Financial Adjustments

We deconsolidate non-recourse project-finance subsidiaries that sit outside the ring-fenced perimeter.

Sources of Information

The principal sources of information used in the analysis are described in the Applicable Criteria.

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

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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