OREANDA-NEWS. Fitch Ratings says that Enel S.p.A.'s new industrial plan 2015/2019 disclosed on 19 March 2015 to the market is unlikely to have an immediate impact on its ratings, as the plan balances attention to debt sustainability with the necessity of repositioning the group towards a sustainable growth pattern. We expect the group's credit ratios to remain within the guidelines for the rating in the next few years. We will analyse the business plan in more detail during the coming weeks.

The plan maintains the strategic focus on networks, renewables and retail businesses, foreseeing a reduction of the installed capacity in conventional generation (cumulative capacity shut down of around 13GW in 2014-2019, related to plants in Italy). From a geographical perspective, growth will be pursued mainly in Latin America (Latam) and other areas outside Europe.

Fitch notes that the current business plan is expected to generate lower net free cash flows, allowing a limited reduction in net debt. However, we acknowledge that Enel has already achieved a net debt reduction in 2014 of around EUR7bn according to Fitch's calculation, largely due to asset sales and the reduction of financial receivables (including tariff deficit). The evolution of EBITDA in 2014 was in line with the company's stated targets.

The main differences compared with the previous plan are the increase in growth investments over the period along with a gradual rise in dividend distribution (pay-out expected to gradually increase to 65% in 2018, while the previous plan only set a floor pay-out at 50% from 2015). Moreover, the current business plan takes a more balanced reference scenario to estimate the operating results.

Growth capex (EUR18.3bn compared with EUR12.4bn in 2014/2018 plan) will be allocated mainly to regulated (networks) and quasi-regulated (renewables) assets. Fitch positively assesses Enel's strategy to invest in multiple small size projects, which provides the issuer with significant financial flexibility if needed. Fitch believes that this approach also reduces costs overrun risk and accelerates the execution period (target time to EBITDA lower than two years).

Management expects to achieve a moderate growth of EBITDA throughout the period (CAGR 2014/2019 of around 2%). The company's strategy aims to gradually offset the still unfavourable market trends in the core countries of Italy and Spain and the negative impact of the upcoming regulatory reviews (in particular for electricity distribution in Italy) with new investments coming on stream and a renewed focus on efficiency.

Both annual maintenance capex and operating costs are expected to decrease by around 8% from 2014 to 2019 in nominal terms, leveraging the new organisational structure. Fitch considers this cost reduction as ambitious, given that some efforts have already been made in this respect in the past few years. The full deployment of the new structure could entail delays or bring lower efficiencies than currently estimated by management. We will closely monitor the development of these actions.

The plan also includes a EUR5bn disposal target with around EUR2bn expected to be realised in 2015 (mainly including minority stakes in the US, a hydro producer in Italy and Slovenske Elektrarne). The cash proceeds deriving from the disposals will be mainly reinvested in the acquisition of minorities' stakes in Latam, with the objective of rationalising the group structure there and reducing dividend leakage.

In our view, the rising focus on Latam and other emerging countries increases Enel's business risk to some extent. On the other hand, the incremental annual EBITDA deriving from industrial growth of around EUR2.4bn expected by management in 2019 should be related by around 90% to regulated and quasi-regulated activities (also through power purchase agreements), thus reducing the overall exposure to the pure merchant businesses to around 25% (from 30% in 2014).

Fitch expects that Enel's interest coverage ratios should benefit from the current low interest rates environment and a proactive approach towards debt management (reduction of gross debt, pre-hedging transactions and renegotiation of committed lines).