Fitch Ratings – Frankfurt am Main – 18 Jun 2021: Fitch Ratings has published EEW Energy From Waste GmbH’s (EEW) first-time Long-Term Issuer Default Rating (IDR) of ‘BBB+’ with Stable Outlook. It has also assigned EEW’s upcoming EUR400 million senior unsecured green bond an expected rating of ‘BBB+(EXP)’.
The final rating is contingent on the receipt of final documentation conforming materially to the bond’s preliminary documentation. The ratings reflect EEW’s leading market position as well as a high share of predictable earnings, which all contributed to a strong performance throughout 2020 despite pandemic-related waste-supply disruptions. The Stable Outlook mirrors Fitch’s expectation that EEW’s funds from operations (FFO) net leverage will on average remain within our rating sensitivities over 2021-2025, albeit with capex-driven breaches of our negative sensitivity in 2022 and 2023.
KEY RATING DRIVERS Constructive Market Environment: Waste recycling accounts for 67% of total waste in Germany against an EU average of 48%. Further demand for waste treatment with a ban on plastic-waste imports into Asia, combined with continued decommissioning of obsolete mechanical biological treatment capacity, support demand on existing capacity. With long-term demand growth supported by an increased population and incineration of sewage sludge, plus limited prospects of new capacity additions, demand is likely to outstrip existing capacity. Despite recent price rises, we assume stable gate fees to 2025.
Leading Market Position: EEW’s energy-from-waste (EfW) business is in the least volatile and most profitable segment of the waste value chain. With a capacity market share of 28%, EEW has a much broader network than its competitors, reducing sensitivity to a single region, allowing local sourcing with above-average profitability, access to imports and an ability to re-route disposal to lower cost regions. With high fixed costs, profitability is achieved by consistently filing available capacity at highest possible gate fees. Plant operating risk is substantially mitigated by ownership of 13 incineration sites and option to acquire another five, well ahead of peers. Resilient Performance in 2020:
EEW’s business model and market positioning proved robust during 2020, despite notable challenges from the pandemic and related confinement measures. EEW experienced disruptions in contracted imported waste streams, but successfully managed to more than offset these volumes with higher municipal and commercial and industrial waste volumes at higher prices. Together with a delay in capex, this drove FFO net leverage to 1.6x, below 2019’s 1.7x. We expect gate fees to normalise over 2021-2025 but to remain slightly higher than pre-pandemic assumptions. Contracted, Diversified Cash Flows: Contracted revenues give visibility to cash flows.
We project contracted waste to account for 95% of waste volumes in 2021, falling to 52% by 2024; for energy the figures are 96% and 69%, respectively. Municipal contracts average 10 years, contract lives are being extended and renewals averaged around 90% since 2014. Municipal contracts up for renewal through 2024 correspond to around 25% of 2020 municipal volumes. Cash flows are similarly diversified. EEW converts waste from multiple customers into output for different customer types, both municipal and industrial, while operatorship fee revenues and leasing receivables at around 15% of revenue are fixed.
Limited Rating Headroom: Capacity utilisation averaged 91% since 2015 and is central to cash flow generation. This depends on a programme of maintenance capex peaking at EUR118.5 million in 2023 and averaging at EUR76 million or 11% of revenues over 2021-2025. However, growth capex for six new projects in our rating case will drive FFO net leverage outside our rating sensitivity in 2022 and 2023, peaking at 2.8x. From 2024 the metric will return to within our sensitivity averaging at 2.4x. Improved Financial Policy: Under state-controlled Beijing Enterprises Holdings Limited (BEHL) ownership since March 2016, EEW tightened its financial policy in November 2020 by eliminating the option to increase leverage beyond its targeted range in case of a major growth project. This decision adds predictability to our forecasts.
However, BEHL’s accelerated cash upstreaming from EEW since 2019 remains opportunistic in an otherwise prudent financial policy, which may constrain ratings. Upcoming Green Bond Issue: Targeted proceeds of EUR400 million will be used to pre-finance the EUR316 million floating-rate tranches of EEW’s EUR407 million Schuldscheindarlehen. Originally, these would mature in 2022 and 2024. The remainder will be invested in further growth of EEW’s sustainable business, which is part of the overall circular economy. Remaining fixed-interest portions under the Schuldschein will be refinanced separately on their maturities in 2022, 2024 and 2027. DERIVATION SUMMARY Veolia Environment (BBB/Stable) is a global diversified environmental management company, which can afford higher indebtedness with company-defined FFO net leverage sensitivities of 4.3x -5.0x under its rating.
EEW is well-positioned within its immediate peer group of waste to power-focused operators. KEY ASSUMPTIONS Fitch’s Key Assumptions Within Our Rating Case for the Issuer – Volumes in line with management projections, based on EEW’s contracted share, as of November 2020, on expected contract renewal process with a record of contract renewal rates of over 90%. – Uncontracted prices 10% lower in waste, power, heat & steam from 2021; contract renewal prices 5% lower in waste. – We added EUR60 million of capex for the new sewage sludge plant in Stavenhagen, which was not included in the company’s capex forecasts.
Likewise, we included associated EBITDA from 2023 onwards with a 10% haircut, as the relevant volumes are not yet fully contracted. – In view of additional capacity being added over the forecast period we inflate the main cost line, services and materials (mainly maintenance, waste deliveries & residues) by Fitch’s CPI estimates from March 2021. – Dividends in line with company guidance. RATING SENSITIVITIES Factors that could, individually or collectively, lead to positive rating action/upgrade: – Operational outperformance leading to FFO net leverage below 1.3x on a sustained basis, supported by a less aggressive capital structure while the links with BEHL remain weak and its profile does not constrain the subsidiary rating. Factors that could, individually or collectively, lead to negative rating action/downgrade: – A substantial debt-funded acquisition.
– Operational underperformance leading to FFO net leverage above 2.5x for more than two consecutive years over the forecast horizon. – Weaker credit profile of BEHL and stronger links with EEW, including tighter operational and financial integration or higher shareholder distributions with a weaker capital structure. 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 Adequate liquidity: EEW had readily available cash and cash equivalents of EUR146 million as at end-2020.
It also had credit lines of EUR95 million, of which EUR59 million was drawn at end-2020 for guarantees only. The credit lines are renewed annually. The company’s debt structure is dominated by EUR407 million of Schuldschein loans, of which EUR310 million mature during 2022, EUR95 million by 2024, and the remainder by 2027. We expect negative free cash flows until 2023 due to capex-driven growth, but for refinancing risk to remain manageable. ISSUER PROFILE EEW is a German EfW-focussed utility, with a portfolio of 18 EfW plants (13 owned, five operated) in Germany (16), Luxembourg (1) and the Netherlands (1) with a total capacity of 5mt a year.
DATE OF RELEVANT COMMITTEE 27 May 2021 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 RATING ACTIONS ENTITY/DEBT RATING EEW Energy from Waste GmbH LT IDR BBB+ Publish senior unsecured LT BBB+ Publish senior unsecured LT BBB+(EXP) Expected Rating VIEW ADDITIONAL RATING DETAILS Additional information is available on www.fitchratings.com APPLICABLE CRITERIA Parent and Subsidiary Linkage Rating Criteria (pub.
26 Aug 2020) Corporate Rating Criteria (pub. 21 Dec 2020) (including rating assumption sensitivity) Corporates Recovery Ratings and Instrument Ratings Criteria (pub. 09 Apr 2021) (including rating assumption sensitivity) Sector Navigators – Addendum to the Corporate Rating Criteria (pub. 01 May 2021) APPLICABLE MODELS Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s).
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