European utilities are likely to lower their planned investments between 10% and 15% this year as they try to preserve cash and cope with supply chain disruptions and other delays related to the spreading coronavirus, S&P Global Ratings said. Dividends in the sector could also be scaled back if the pandemic drags on and threatens to significantly cut into earnings.
"We see significant risks that [capital expenditure] will decline materially from utilities' previous plans as they focus on their priority projects," analysts from Ratings said in a report March 24. "Utilities currently have some degree of flexibility on their investment program and dividends, which can therefore be cut to accommodate lower earnings and cash preservation."
Europe's largest utilities plan to spend billions on building new wind and solar plants, expanding their power and gas networks, and branching out into new business areas such as energy storage and electric vehicles. Italy's Enel SpA, one of the largest in the sector, expects to invest about €10 billion every year.
The prediction by Ratings echoes previous comments by Moody's and Fitch Ratings, whose analysts also think that companies could scale back their growth plans amid lower power prices and the suspension of consumer bills, which could squeeze short-term cash flow.
Italian gas transmission operator Snam SpA became the first large player in the industry to scale back its expected investments in response to the spreading coronavirus, indicating March 19 that it could delay between €50 million to €200 million of its planned spending this year due to the "complex market environment" caused by the pandemic.
Germany's E.ON SE said March 25 that it could also see delays in deploying capital as countrywide lockdowns drag out ongoing projects. Wind and solar developers are likely to encounter problems sourcing parts as factories shut down and global trade is hampered, and Ratings also foresees a slowdown in decision-making and permitting processes.
"Realistically, we have to expect that our planned investments for 2020 will encounter delays if only because there will be significantly less construction capacity available," E.ON CFO Marc Spieker said on an earnings call, adding that the overall impact on the company's earnings and investments should be "limited."
While measures to save cash, such as postponing investments, would be credit positive for utilities, Ratings said it would also delay earnings growth and could lead to longer maintenance outages at nuclear plants or lower profitability for large-scale projects such as offshore wind farms.
Resiliency and risk
Ratings said utilities are generally more resilient to the effects of the pandemic, given the regulated nature of much of their activities and relatively better access to capital markets. Most companies have reduced their merchant exposure in favor of fixed-price renewables in recent years, and utilities usually hedge their remaining merchant exposure at least a year ahead.
Still, downward pressure on power prices, caused by lower commodity prices and reduced demand for gas and electricity, could pose problems for some generators in 2021, when forward hedges are between 50% and 70% lower, Ratings said. Earnings could suffer at companies with large merchant baseload plants, including Electricité de France SA, Germany's Uniper SE, Austria's Verbund AG, and CEZ a. s. in the Czech Republic.
Some retail suppliers could also end up with further losses if produced power volumes decline by 5% to 7% this year compared to 2019, as Ratings now expects. Governments in countries such as the U.K. and France have additionally put in place protections for vulnerable customers, which could increase debt as working capital requirements soar and squeeze results for large retail suppliers including EDF, Enel and E.ON as well as Spain's Iberdrola SA and Britain's Centrica PLC.
Additional pressure could come from higher pension liabilities and asset retirement obligations due to lower discount rates and the broader stock market decline, which could weaken the credit health of some companies, the report said.
More broadly, the analysts see ratings in the sector pressured by increased sovereign risk, especially pronounced for utilities because they often have strong links with governments. Ratings listed Snam and Italian power grid operator Terna - Rete Elettrica Nazionale Società per Azioni as particularly exposed to a potential sovereign downgrade, along with mostly Eastern European companies.
In lower-rated countries such as Georgia and Lithuania, utilities could also struggle with refinancing this year, although liquidity among larger companies in the sector is generally strong. For example, Ørsted A/S, the Danish offshore wind powerhouse, said March 25 that it had enough liquidity reserves to support its operations and construction program through 2020 and 2021 without further funding.