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Fitch Revises Orsted’s Outlook to Negative; Affirms IDR at ‘BBB+’
Wed 22 Jan, 2025 – 05.28 ET
Fitch Ratings – Milan – 22 Jan 2025: Fitch Ratings has revised Orsted A/S’s Outlook to Negative from Stable, while affirming the Danish renewables generation company’s Long-Term Issuer Default Rating at ‘BBB+’. A full list of rating actions is below.
The Outlook revision mainly reflects the recent negative developments in the Sunrise Wind project and more broadly, in the US offshore operations. These involved delays, significantly increased costs and investments, and reduced appeal for third-party investors regarding the sale of unused seabeds. These factors have increased the execution risk embedded in US farm-downs, increasing the likelihood of a breach of the funds from operations (FFO) net leverage negative rating sensitivity over 2025-2027.
We expect Orsted to present other business updates, potentially including additional counter-measures to protect its capital structure, during the upcoming full-year result presentation. This will largely determine its rating trajectory, together with our likely negative reassessment of the business profile, mainly related to residual risks entailed in large US offshore wind projects.
Key Rating Drivers
Problems Continue with US Offshore: In addition to mid-year impairments and postponements experienced by Revolution Wind in 2024 (0.7GW; 50% ownership), severe delays on the fully owned Sunrise Wind project (0.9GW) have pushed the expected completion date to late 2027 and significantly increased capex.
The limited market interest in unused US seabeds underlines the low appeal of US offshore operations for investors and, alongside the non-cash impact of high interest rates on the valuation of some projects, has led to an additional impairment charge of DKK12 billion (or EUR1.6 billion), on top of the more than EUR4 billion recorded since September 2023 related to US legacy projects.
Medium-Term Net Leverage Pressure: The impairment charges, alongside our revised assumptions regarding the financial terms and timeline of US farm-downs and disposals could result in FFO net leverage materially breaching itse negative sensitivity in 2027 if not adequately mitigated, based on our preliminary estimates. In our previous estimates, US farm-downs and disposals represented about 30% of the DKK70 billion-DKK80 billion net inflow in Orsted’s 2024-2026 business plan.
No Specific Rating Commitments: Management has not expressed commitment to a specific rating, preferring instead to target a solid investment-grade status and a company-defined FFO/net debt of more than 30%. We estimate that this may not be sufficient to preserve the current rating, considering the execution risk we would include in our projections (versus management’s) and the likely downward revision of the debt capacity, due to the heightened business risk.
Contracted Profile, Solid Trading: Orsted maintains a strong business profile, supported by a large share of quasi-regulated and contracted earnings (around 80% of EBITDA) and an average remaining subsidy lifetime of 16 years for offshore projects. Onshore projects are typically contracted at 65%-100% of generation capacity, with an average subsidy duration of 14 years. In 9M24, Orsted reported an EBITDA, excluding new partnerships and cancellation fees, of DKK17 billion, representing almost a 5% growth year-on-year and is on track to meet its key 2024 financial targets (excluding the impairments).
Rated on Standalone Basis: Orsted is rated on a standalone basis using our Government-Related Entities (GRE) Rating Criteria, because we do not see strong enough responsibility and incentives for support from the Danish state (AAA/Stable), which owns 50.1% of the company. Under Fitch’s GRE Criteria we see ‘virtually no expectations of support’.
Derivation Summary
Orsted’s rating is at the same level as Statkraft AS’s (A-/Negative) Standalone Credit Profile (SCP) of ‘bbb+’, reflecting the latter’s materially lower FFO net leverage of 2.5x (versus Orsted’s around 3.0x), but also Orsted’s higher debt capacity on a standalone basis, due to its 80% quasi-regulated cash flows. Statkraft has a much larger hydro fleet, but around two thirds of its production are exposed to Nordic power prices.
Orsted shares a similar debt capacity with Corporacion Acciona Energias Renovables, S.A. (BBB-/Stable). Orsted has a higher share of contracted/incentivised income stream at 80%, versus Acconia’s 70%, and better geographical diversification. This is balanced by Acciona’s focus on onshore wind and solar developments, which we view as lower risk. Acciona is rated two notches below Orsted, due to higher projected FFO net leverage.
RWE AG (BBB+/Stable) is a generation-focused utility with a large conventional and renewable fleet. Around half of RWE’s EBITDA originates from renewables, but Orsted has a higher debt capacity due largely to a greater proportion of contracted renewables in its generation mix.
Orsted’s wind farm operations benefit from quasi-regulated income but the debt capacity of this business is lower than that of regulated networks. As a result, it has a lower debt capacity than that of integrated utilities such as Enel S.p.A. (BBB+/Stable) and Iberdrola, S.A. (BBB+/Stable).
