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Race to renewables could stretch utility balance sheets, Fitch says

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A solar farm in Spain. The country looms large in capex plans by some utilities, like Iberdrola and Enel.
Source: AP Photo

Europe's largest integrated utilities and grid operators risk stretching their balance sheets in the long run by going all in on renewables, Fitch Ratings has warned.

Some of the biggest names in the sector are planning to spend big bucks on renewables and related grid upgrades in the coming years. Italy's Enel SpA last month unveiled a new capital investment plan that will see it spend almost €30 billion over the next three years, 11% higher than its previous investment plan. Most of the money will flow to new wind and solar farms as well as networks.

Spain's Iberdrola SA tacked another €2 billion onto its four-year capital expenditure budget earlier this year and others, including Germany's RWE AG, are also ramping up their spending on green power.

Since most of the new assets will be regulated networks and contracted renewables, supported through government auctions or deals with industrial offtakers, most companies will likely keep their leverage stable in the next few years, despite rising levels of debt. But Antonio Totaro, a senior director at Fitch, said in an interview that things could change once wind and solar parks reach the end of their subsidies.

While regulated income is compensating for the impact of higher capex and dividends for now, "in the long-term, that could change because renewables could become a merchant part of the business," Totaro said. "That could weaken the predictability of the cash flow and weaken the business profile."

Fitch expects the 15 largest integrated utilities, excluding Germany, to take on €10 billion in additional debt next year. Between 2017 and 2021, the companies are set to increase their combined debt by almost one fifth, to €246 billion. At the same time, the ratio of net debt to funds from operations across the group increased from 3.1x in 2017 and 2018 to 3.4x this year, where it will hover for the next two years, Fitch said in its outlook for EMEA utilities on Dec. 4.

E.ON SE alone is more than doubling its net debt to €39.6 billion by swallowing most of rival innogy SE this year, but Totaro said the increased cash generation from the power grids it is taking on as part of the transaction fully makes up for the higher debt.

Similarly, Enel's new investment plan will actually increase its regulated asset base, particularly by expanding its electricity networks in Latin America, according to S&P Global Ratings. Despite a likely increase in debt from €46 billion to €47.5 billion next year, Enel should therefore be able maintain "comfortable rating headroom," S&P said on Dec. 5, safeguarding its BBB+ rating, particularly if it uses additional debt to simplify its business structure or to fund acquisitions.

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First-mover advantage

Higher spending on green energy by integrated utilities makes financial sense in the face of increasingly cut-throat competition, according to Totaro. "There's a kind of rush that we see in [companies] trying to show that they are moving and adjusting to the energy transition," he said.

"There are more and more players in the arena, margins are getting smaller — being the first mover, having a very large pipeline spread around the world ... that seems to be the only way to remain profitable in the mid- to long-term."

For pure network operators, meanwhile, pressure is increasing to follow up those renewables investments by reinforcing networks so they can handle higher volatility and more distributed generation. Common wisdom dictates that every euro spent on new renewables capacity needs the same amount in grid investment, Totaro said. Digitalizing networks to enable better demand and supply balancing also costs money.

Fitch expects leverage among transmission operators to increase slightly, from 5.1x to 5.3x, in 2020. In Germany alone, proposed capex by the country's four transmission utilities for the next decade has ballooned to €61 billion, up from €33 billion only two years ago. And in Italy, Terna - Rete Elettrica Nazionale Società per Azioni has increased its five-year investment plan by around 55% in the last two years, according to Fitch.

Although ratings for integrated and grid utilities appear mostly secure for now — with the exception of gas networks in Spain, where the threat of lower regulated returns still looms — that is partly because ratings in Europe have already slipped.

Over the last 10 years, ratings among European utilities covered by Fitch have broadly dropped from the A category to a BBB rating, which now represents 58% of the sector. The share of companies with a BB rating is now 17% and growing, Fitch said, particularly in emerging markets but also among power generators more broadly.

This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings. Descriptions in this news article were not prepared by S&P Global Ratings.