Fitch Ratings has affirmed Enel S.p.A.'s Long-Term Issuer Default Rating (IDR) and senior unsecured rating at 'BBB+'.
It has also affirmed its Spanish subsidiary Endesa, S.A.'s Long-Term IDR and senior unsecured rating at 'BBB+' and 'A-', respectively. The Outlooks on the IDRs are Stable. A full list of rating actions is detailed below.
The affirmation mainly reflects Enel's 2024-2026 defensive strategic updates and good operating performance in 2023. The latter was mainly underpinned by a strong recovery of its Italian integrated generation-supply business and material margin-call reduction, which compensated one-off deterioration of its Spanish gas business.
Enel's increased focus over Italian regulated distribution, operational efficiencies and the prioritisation of renewables profitability over growth will ultimately limit drain on free cash flow (FCF), while fostering EBITDA growth. This should result in net leverage that is in line with current ratings and their Stable Outlook.
Key Rating Drivers
Defensive Strategy Update: Enel has increased commitment towards defensive Italian regulated activities (34% of gross 2024-2026 investments) and focus on risk-return balance across all its businesses. This resulted in reduced targeted renewables capacity growth (4.5GW per year vs. prior 7GW ambitions), while related investment would be further reduced through the release of EUR4 billion capital linked to expected partnerships. On the other hand, the original EUR15 billion 2023-2024 disposal plan has been reduced to EUR11.5 billion, with Enel putting on hold its decision to sell its Spanish gas portfolio and Ceara's Brazilian electricity distribution activities.
Unchanged Robust Business Profile: We do not envisage a dilution of Enel's robust business profile, as a result of the new strategy. Its 2024-2026 EBITDA will remain skewed towards regulated distribution activities (37% in Fitch estimates), regulated generation and supply activities (8%), long-term contracted renewables generation in Latam and North America (13%) as well as predictable integrated generation-supply activities in Italy and Spain (33%), where the group would maintain a large client base. We have slightly tightened Enel's debt capacity by 0.2x (FFO net leverage) to improve consistency with its immediate peers'.
Stabilising Net Leverage: We estimate Enel's FFO of around EUR12 billion and the reduction of more than EUR9 billion of its margin calls to have helped reduce 2023 Fitch-adjusted net debt to EUR70 billion and FFO net leverage to 4.5x, from their 2022 peaks of EUR77 billion and 5.7x, respectively.
We expect FFO net leverage to remain at around 4.3x, strongly benefitting from more moderate annual investments of EUR8.7 billion net of partnership and grants (EUR11.9 billion in prior plan), EUR1.2 billion cost savings and almost EUR6 billion planned disposal, mostly of Peruvian and Greece assets. This is despite Fitch's 2024-2026 EBITDA expectation being 6% lower than management guidance, mainly due to the assumption of faster-than-expected normalisation of European energy prices negatively affecting integrated business margins.
Supportive Italian Market: Italy's mature regulatory framework shields Enel's distribution activities from high inflation (albeit with a one-year lag) and higher interest rates (via 80bp rise of allowed weighted average cost of capital in 2024 to 6.0%), as well as from volatile energy prices and consumption. Such support could be reinforced by the transition towards the full total expenditure method in 2026, with an emphasis on output-based incentives. Further, we do not expect the transition towards a liberalised supply market to excessively penalise Enel, which will maintain its strong market position even if it redefines its geographical presence and offer to retail customers.
Moderate Exposure Outside Europe: We take a positive view of Enel' reiterated focus over only selected Latam countries like Brazil, Chile and Colombia (23% of EBITDA and 19% of gross investments) where it has gained significant scale, strengthened its integrated position across the value chain and locked in generation profit through long-term purchasing power agreement (PPA) contracts. Compared with its prior plan, US renewables development short-term ambitions are broadly intact (12 GW in 2026, 5% of EBITDA and 7% of gross investment) as is their fully contracted nature.
Endesa's SCP Maintained at 'bbb+': We continue to assess Endesa's Standalone Credit Profile (SCP) at 'bbb+'. This is notwithstanding temporarily higher debt in 2022 and 2023 due to volatile gas market conditions and large cash collateral requirements, which have now largely unwound. We estimate leverage to have increased above our negative sensitivity for 2023 but we expect it to return comfortably within the 'bbb+' SCP levels from 2024.
Endesa targets net debt/EBITDA of 1.4x by 2026, which is equivalent to about 2.0x FFO net leverage and commensurate with a higher SCP. In our rating case, including more conservative assumptions on wholesale and selling prices and production, we forecast FFO net leverage to average 3.3x for 2024-2026, still with adequate headroom to their current sensitivities.
Endesa's Supportive Business Plan Update: Endesa's updated plan for 2024-2026 with EUR8.9 billion of capex envisages positive FCF and further deleveraging. This is supported by sustained cash flow generation due to higher coverage of customer demand with internal renewable sources, the inclusion of a partnership model for new developments and solar assets in operation, and a greater focus on efficiencies versus its previous plan.
Endesa's stronger balance sheet over this period is set to take on investment opportunities from 2026 in distribution and non-mainland generation businesses, if the upcoming regulatory reviews are set favourably for returns that are in line with Endesa's investment policy.
Senior Unsecured Uplift for Endesa: The affirmation of Endesa's 'A-' senior unsecured rating reflects its share of regulated earnings on average at more than 50% (electricity networks, non-mainland generation regulated supply, and including 10% of quasi-regulated renewables income, ie wind farms under the RECORE mechanism) to 2026. For Enel, the senior unsecured rating of 'BBB+' is at the same level as its IDR, constrained by Italy's 'BBB'/Stable rating.
Derivation Summary
Enel is a fully integrated utility with one of the most diversified profiles by business and geography, which is comparable with that of Iberdrola, S.A. (BBB+/Stable). Both groups have anticipated the energy transition ahead of other European utilities.
We see slightly lower business risk for Iberdrola with a 5.1x FFO net leverage negative sensitivity versus Enel's 4.7x at 'BBB+'. This is due to Iberdrola's higher exposure to regulated network EBITDA at 50% versus Enel's slightly below 40% and long-term incentivised/contracted renewables of 21% versus Enel's 13%, which is partially counterbalanced by a lower share of its integrated generation and supply activities in its business mix.
Furthermore, Iberdrola benefits from a greater share of income from higher-rated geographies (the UK and the US) and a cleaner asset base than Enel, while Enel is larger in scale and has swifter returns on capex. We project FFO net leverage at around 4.3x for Enel and 4.4x for Iberdrola, with reasonable headroom within their 'BBB+' ratings.
Compared with Engie S.A. (A-/Stable), Enel benefits from a higher share of regulated networks and quasi-regulated activities in EBITDA, as well as larger operations in renewables leading to better earnings predictability. In addition, Engie is more exposed to the gas industry, which we view as a weakness in light of its higher long-term climate risks than for electricity. On the other hand, Engie's growth in renewables and infrastructure assets will bring its business mix closer to that of Enel and Iberdrola, and we view its geographic mix as stronger than Enel's due to a lower exposure to higher-risk countries, including in Latam.
Overall, we view Engie's debt capacity as lower than Enel's at their respective ratings, with the rating differential attributed to Engie's lower expected nuclear-adjusted net leverage (negative sensitivity at 4.0x FFO nuclear-adjusted net leverage).
Enel has the same rating as Electricite de France (EDF) (BBB+/Stable), but higher debt capacity on a standalone basis. For EDF's SCP, the negative sensitivity for 'bbb-' is 4.7x, while a similar threshold keeps Enel's IDR at 'BBB+'. This mainly reflects EDF's ageing nuclear fleet, an estimated regulated and contracted EBITDA share under normal price conditions of 30%-40% and exposure to large nuclear projects with higher execution and operational risks.
Enel's business profile is also comparable to that of SSE plc (BBB+/Stable), notwithstanding the latter's much smaller size and lack of geographical diversification. This is mostly attributable to a 40% estimated share of total EBITDA for high-quality UK regulated networks and 15% for incentivised renewables generation.
Key Assumptions
Fitch-defined group EBITDA (ie considering leases as operating expenditure and excluding non-recurring items) to progressively increase towards EUR21.9 billion in 2026 from EUR20.4 billion estimated for 2023 (excluding disposal effects). This is mainly supported by growth in regulated network (up EUR0.9 billion) and partially by integrated business expansion (up EUR0.6 billion). The latter is under pressure from rapidly decreasing power prices in Italy and Spain and at group level for progressively lower contribution from gas and trading as well as from regulated generation and supply activities
Energy prices around EUR100/MWh in Italy, albeit with a decreasing trend in 2024-2026
Energy prices in Spain at EUR106/MWh in 2024, EUR75/MWh in 2025 and EUR70/MWh in 2026, and with windfall tax (1.2% tax on unregulated and domestic revenues) taking effect in 2023, 2024 and 2025 for a total of EUR0.6 billion
Tax rate on earnings at 29%
Working capital, excluding EUR9 billion of margin-calls cash inflow, to cumulatively deplete EUR2 billion cash in 2023-2026
Capex, net of partnership and grants, at around EUR27.2 billion in 2024-2026, (conservatively EUR1 billion higher than management's guidance) and broadly equally split between the years
Business repositioning as per management strategy, with disposals for an enterprise value assumed at EUR9.5 billion in 2023-2024 in line with management assumption, largely used to fund investments
Dividends based on Enel's policy of guaranteed dividend per share
RATING SENSITIVITIES
Enel
Factors That Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade:
FFO net leverage at 4.0x or below and FFO interest coverage above 4.5x on a sustained basis
Factors That Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade:
FFO net leverage above 4.7x and FFO interest coverage below 4.0x on a sustained basis, due to further material delays in the execution of its significant disposal plan or weak operating performance
Adverse regulatory or fiscal changes affecting the predictability of cash flows could lead us to tighten the leverage guideline for the rating
Endesa
Factors That Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade:
An upgrade of Enel, provided that our assessment of Endesa's linkage with Enel is unchanged
FFO net leverage below 3.3x on a sustained basis may lead to an upward revision of the SCP and, if combined with weakening ties with Enel (ie a largely self-funded financing strategy), to an upgrade of the IDR
Factors That Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade:
A downgrade of Enel, provided that our assessment of Endesa's linkage with Enel is unchanged
FFO net leverage above 4.0x on a sustained basis may lead to a downward revision of the SCP but not necessarily the IDR
Liquidity and Debt Structure
Adequate Liquidity: At end-September 2023 Enel had readily available cash of around EUR3.8 billion with undrawn committed credit lines of EUR19.3 billion, of which EUR18.6 billion were with maturities beyond September 2024. This, together with an estimated positive EUR4.5 billion FCF after disposal proceeds and its recent EUR1.75 billion new bond issuance would adequately cover debt maturities of around EUR17 billion until end-2024.
Enel benefits from continuing access to capital markets and strong banking relationships, as underlined by successful bond issuance in different markets (including green bonds, sustainability-linked bonds and sizeable US dollar issuance).
Debt Structure: Total gross reported debt at end-September 2023 was significantly lower at EUR77.4 billion versus EUR96.1 billion a year ago, following a material decrease in funding needs to cover margin calls and working-capital normalisation. Under its business plan to 2026, gross debt should normalise at slightly higher levels than 2021's.
Enel raises most of its gross debt within itself or through the vehicle Enel Finance International NV (irrevocably guaranteed by the parent). Together they represent around 64% of Enel's reported gross debt (not including hybrids, factoring and lease-related debt) and 88% of the outstanding bonds at end- September 2023. Endesa remains materially funded by inter-company loans (EUR6.5 billion) and a revolving credit facility granted to Enel (EUR3.5 billion) that are mostly used as a back-up for its commercial paper.
Issuer Profile
Enel is one of the largest integrated utilities in the world, with a leading position in renewables, distribution and supply. Endesa is a market leader in Spain and is the second-largest power company in Portugal.
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
Enel has an ESG Relevance Score of '4'[+] for energy management, due to its strategic choice to invest heavily in renewables, ahead of many peers, which has been one of the factors leading to higher stability and visibility of cash flows, due to the largely contracted nature of renewables production. This has a positive impact on the credit profile, and is relevant to the rating in conjunction with other factors.
Enel has an ESG Relevance Score of '4'[+] for greenhouse gas emissions & air quality, due to the company's ongoing reduction of emission intensity, which leads to a better positioning in the merit order, lower operational risk and decreasing exposure to the emission-trading system and commodities price trend. This has a positive impact on the credit profile, and is relevant to the rating in conjunction with other factors.
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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation of the materiality and relevance of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
ENEL S.P.A. 
