Rating Action Commentary
ֳ Revises Orsted's Outlook to Negative; Affirms IDR at 'BBB+'
Wed 22 Jan, 2025 - 5:28 AM ET
ֳ - Milan - 22 Jan 2025: ֳ 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 ֳ'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).
Key Assumptions
ֳ's Key Assumptions Within our Rating Case for the Issuer
- Total renewable generation increasing towards 45 TWh in 2027
- ֳ-defined EBITDA increasing towards DKK27 billion by 2027
- Ocean Wind 1 cancellation fees of DKK9 billion in 2024 classified as extraordinary items
- Effective interest rate averaging around 4% to 2027
- Cumulative working-capital release of DKK6.6 billion until 2027
- Cumulative capex of DKK168 billion, partially offset by cumulative disposals of DKK69 billion
- No dividends across 2024-2027
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
- FFO net leverage above 3.2x or FFO interest cover below 4.0x for a sustained period
- A further materialising of governance or construction risk through higher-than-expected cost overruns or lower awarded incentives, cancellation fees and delays to key wind farm projects, if not sufficiently compensated by a more conservative capital structure on a sustained basis
-A substantial reduction in the share of incentivised and contracted revenues to below 80% of wind power production, or unsatisfactory profitability or hedging strategy,
- The last two factors above could also lead to a tightening of rating sensitivities
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
- Due to the Negative Outlook, an upgrade of Orsted is unlikely in the near future
- A business plan update including a more prudent capital structure and supported by credible protective measures could lead to the Outlook being revised to Stable
Liquidity and Debt Structure
At end-September 2024, Orsted maintained a strong liquidity position comprising over DKK64 billion of readily available cash, liquid securities and committed credit facilities, which fully covers its forecast negative FCF after disposals over the next two years. Orsted's liquidity also benefits from limited senior unsecured maturities to 2026 of DKK0.4 billion.
Orsted has good access to capital markets. It maintains a large share of fixed-rate debt, which helps contain increases in the average cost of debt, despite sharply higher market interest rates.
Issuer Profile
Orsted is the world leader in offshore wind with an installed capacity of almost 9GW (on average 51%-owned). The company is also developing its presence in onshore wind and solar generation (around 5GW on average at more than 50% ownership) and Power-to-X, and owns combined heat and power plants.
Summary of Financial Adjustments
ֳ-adjusted debt excludes the debt reported under IFRS with regard to Orsted's divestment of a 50% stake in a portfolio consisting of three onshore wind farms and one solar farm in the US to a financial investor. The value of the transaction, completed in October 2022, was about USD410 million for a 50% stake. This debt stems from the full consolidation of the project and is calculated from the net present value of the partner's share of expected FCF in the project, paid out as dividends. The exclusion of the debt reflects our treatment of dividends to the partner, which are deducted from our projected FFO.
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.
MACROECONOMIC ASSUMPTIONS AND SECTOR FORECASTS
to access ֳ's latest quarterly Global Corporates Macro and Sector Forecasts data file which aggregates key data points used in our credit analysis. ֳ's macroeconomic forecasts, commodity price assumptions, default rate forecasts, sector key performance indicators and sector-level forecasts are among the data items included.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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. ֳ's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on ֳ's ESG Relevance Scores, visit /topics/esg/products#esg-relevance-scores.
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PARTICIPATION STATUS
The rated entity (and/or its agents) or, in the case of structured finance, one or more of the transaction parties participated in the rating process except that the following issuer(s), if any, did not participate in the rating process, or provide additional information, beyond the issuer’s available public disclosure.
APPLICABLE CRITERIA
APPLICABLE MODELS
Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s).
- Corporate Monitoring & Forecasting Model (COMFORT Model), v8.1.0 (1)
ADDITIONAL DISCLOSURES
ENDORSEMENT STATUS
| Orsted A/S | EU Issued, UK Endorsed |