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COMMENTS

ESG Industry Report Card: Regulated Utilities Networks


ESG Industry Report Card: Regulated Utilities Networks

Analytic Approach

Environmental, social, and governance (ESG) risks and opportunities can affect an entity's capacity to meet its financial commitments in many ways. S&P Global Ratings incorporates these considerations into its ratings methodology and analytics, which enables analysts to factor in short-, medium-, and long-term impacts--both qualitative and quantitative--to multiple steps of their credit analysis. Strong ESG credentials do not necessarily indicate strong creditworthiness (see "The Role Of Environmental, Social, And Governance Credit Factors In Our Ratings Analysis," published Sept. 12, 2019).

Our ESG report cards qualitatively explore the relative exposures (average, below, above average) of sectors to environmental and social credit factors over the short, medium, and long term. For environmental exposures, chart 1 shows a more granular listing of key sectors and (in some cases) subsectors reflecting the qualitative views of our analytical rating teams. This sector comparison is not an input to our credit ratings and not a component of our credit rating methodologies; it is based on our current qualitative, forward-looking opinion of credit risks across sectors.

In addition to our sector views, this report card lists ESG insights for individual companies, including how and why ESG factors may have had a more positive or negative influence on an entity's credit quality compared to sector peers or the broader sector. These comparative views of environmental and social risks are qualitative and established by analysts during industry portfolio discussions, with the goal of providing more insight and transparency.

Environmental risks we considered include greenhouse gas (GHG) emissions, including carbon dioxide, pollution, and waste, water and land usage, and natural conditions (physical climate, including extreme and changing weather conditions, though these tend to be more geographic/entity-specific than a sector feature). Social risks include human capital management, safety management, community impacts, and consumer-related impacts from customer service and changing behavior to the extent influenced by environmental, health, human rights, and privacy (but excluding changes resulting from broader demographic, technological, or other disruptive industry trends). Our views on governance are directly embedded in our rating methodology as part of the management and governance assessment score.

Chart 1

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The list of entities covered in this report is not exhaustive. We may provide additional ESG insights in individual company analyses throughout the year as they change or develop, with companies expected to increasingly focus on ESG in their communication and strategy updates.

Environmental Exposure

We view the environmental risks to utility networks as generally moderate credit drivers only, because we assess the sector based on its infrastructure rather than emissions. However, where electric power supply arrangements bind the delivery network to generation supplies with significant emissions, we will attribute the emissions exposure to the electric network. Electric, gas, and water networks each have specific environmental drivers.

Electric networks:   The energy transition implies a substantial increase in electrification over the next two decades. As a result, electric network operators will likely invest heavily to accommodate the rising share of renewables and make the grid more decentralized and smart. The key environmental risk factor, however, stems from the recent and more frequent physical climate-change events (e.g. wildfires, storms, hurricanes, and tornadoes).

The actual credit exposure incurred by each utility will depend on the regulatory construct. For example, California's recent catastrophic wildfires have pressured the credit quality of the state's utilities because the regulatory construct doesn't account for the consistent and timely recovery of wildfire costs. This contrasts to Florida, where the utilities have proactively implemented storm-hardening measures and have helped implement a regulatory construct that is well equipped to deal with the timely recovery of catastrophic hurricane costs.

Natural gas networks:  These are construed underground and their primary environmental exposure therefore stems from their indirect exposure to fossil fuels, besides the risks of leaks and explosions (see Social Exposure below). Gas is however considered a vital bridge in the energy transition with global demand set to steadily increase over the next two decades. That said, a faster-than-anticipated shift to renewables, and improvements in battery technology, could curb demand for gas. These factors could also incentivize regulators to be less supportive on remuneration and expansionary capital expenditure (capex), as seen recently in Spain for transmission.

Water networks:   Environmental risks center on clean water, water usage (i.e. spills and losses), and treatment of wastewater. Each of these tend to be regulatory key performance indicators (KPIs) and thus relevant to credit. We note that repeated poor operating performance can lead to financial penalties, and expensive capital investment mandates, but can also increase the social exposure of an entity as this can lead to a loss of reputation and create difficult relationships with a company's regulator, hindering its negotiation power during a price reset. Exposure to climate change for water utilities is particularly relevant for entities operating in regions with water scarcity, given that drought conditions could affect water supply and increase requirements on water management and leakage.

Social Exposure

We see regulated networks' exposure to social factors as the most important ESG factor and above average, compared to other industry. Related credit risks can be significant, because companies in this segment play an important role within their communities by providing an essential service that must remain affordable and reliable.

Governments and regulators have been increasingly focusing on affordability, and we believe this could translate into further remuneration pressure for regulated networks. This is especially so in countries where bills are already high, and facing upward cost pressures from ongoing high investments in renewables and grid strengthening as part of the energy transition as well as aging infrastructure and changes in regulatory requirements in all sectors. A failure to maintain high-quality standards at an affordable cost for customers, or a system disruption, could trigger local criticism or political backlash.

Employee relationships constitute another important social factor. Incumbent network operators are often large local employers that sometimes have unionized staff. That said, they also have a degree of local government support because they usually significantly contribute to the local property tax base.

Finally, we point to the importance of safety for gas networks in particular as explosions are seldom but can involve significant casualties, and reputational and litigation risk in the case of poor maintenance management. Water contaminants including lead, and overflows of untreated sewage, can pose significant reputational risk for water and wastewater utilities.

ESG Risks In Regulated Utilities (Networks)

Europe, The Middle East, And Africa

Table 1

Company name/Rating/Comments Analyst name
Enagas S.A.(BBB+/Stable/A-2)  
Environmental and social aspects are a comparatively higher risk for gas transmission companies in Spain compared with electricity peers'. This is because gas will play a less important role than before in the nation's upcoming energy policy, reflected in the proposed strong downward revision in remuneration and incentives for gas transmission for the new 2021-2026 regulatory period. Spain targets almost zero carbon-dioxide emissions (on energy and cars) by 2050, which poses a long-term challenge for gas infrastructure companies. That said, we consider that gas will still be crucial to the energy mix for the transition process over the next two decades, bearing in mind the expected phase-out of coal and nuclear in Spain. The company has a good track-record in operating a reliable and safe network, which is key to managing regulatory risk and public opinion. We assess Enagas' management and governance as satisfactory. However, the company is involved in a dispute with the Peruvian government: the latter unilaterally terminated Enagas' concession for the Gasoducto Sur Peruano (GSP) project in 2017. We understand this was triggered by allegations of bribery against Enagas' partner in the project, Brazilian company Odebrecht. Initially, Enagas expected to receive as compensation almost all the net accounting value of the project, equivalent to its investment (about €400 million) in 2020. Now the compensation is expected at year-end 2022 at the earliest. Massimo Schiavo
E.ON SE(BBB/Stable/A-2)  
Since the successful spin-off of its fossil-based generation business (Uniper SE) in 2017 and the ongoing corporate transformation involving the asset swap with RWE Aktiengesellschaft, we see E.ON's environmental and social risk profile as strongly reduced and becoming more comparable to that of other fully regulated network operators. We estimate that about 70% of the EBITDA of the new E.ON will stem from regulated gas and electricity distribution, with only 5% still coming from non-core merchant power generation, i.e. its retained nuclear power plants, which are to be phased out by end-2022. Nuclear waste storage liabilities were successfully transferred to the German federal government against payment to the German Nuclear Waste Disposal Fund in 2017. While E.ON remains responsible for the decommissioning and dismantling of its nuclear plants, we believe liabilities are reasonably predictable (extending over the 15-25 years following each plant closure). New E.ON's capex focus should adapt to Europe's ambitious energy transition targets; maintaining, expanding and "smartening" distribution system networks in its widespread regulated service area. We expect European distribution system operators' (DSOs') role will shift toward building and operating intelligent networks ("smart grids") using modern technology able to utilize local and regional flexibility and sector coupling (power to heat, power to gas, batteries, micro-gas turbines, for example) to sustain security of supply and avoid costs for expanding network at higher voltage levels (see "Industry Top Trends 2020: Utilities-- EMEA Regulated," published Nov. 13, 2019 on RatingsDirect). We view new E.ON as having an advantage in fulfilling these tasks in comparison with smaller regional operators (such as municipalities) thanks to its lower procurement costs and superior procurement capabilities. Since 2018, E.ON has been aligning its sustainability strategy with U.N.'s Sustainable Development Goals, a key step in promoting transparency and comparability. One of the concrete goals is to reduce its absolute CO2 footprint by 30% by 2030 compared with 2016; which E.ON reduced by 17% in 2018 already (scope 1, 2, and 3). In addition, E.ON is working to halve the CO2 intensity of the electricity it sells. Bjoern Schurich
EP Infrastructure(BBB/Stable/--)  
EP IF has higher environmental risks than peers' because its operations include district heating from coal and gas resulting in carbon dioxide discharges. That said, revenue from lignite-related activities is less than 10% of the total group revenues. EP IF is aiming to reduce its emissions by converting coal plants to biomass, gas, or waste-to-energy heating plants. EP IF also focuses on gas transmission, gas and electricity distribution, and gas storage activities in the Czech Republic, Slovakia, and Germany through its subsidiaries. EP IF's exposure to social risks is comparable to that of the industry as we view the regulatory frameworks under which it operates as supportive. The company has a good track record in operating a safe and reliable network, which is key to managing regulatory risk. We assess the company's management and governance as satisfactory thanks to a strong shareholders agreement. This is despite the fact that the group's majority owner--Daniel Kretinsky--is the CEO and chairman, serves on multiple subsidiary boards, and is integral to the group’s culture, which represents key-man risk. This is somewhat mitigated by the delegation of key responsibilities to certain senior executives. Renata Gottliebova
Kraftringen Energi AB (publ)(BBB+/Stable/A-2)  
Kraftringen is a front-runner in the Nordic region in terms of using only fossil-free fuels in its district heating business. Kraftringen has lowered its annual carbon dioxide footprint by 90% since 2007 and reached its fossil-free fuels goal in 2018. Thanks to this, Kraftringen is in our view less exposed to political risks. Swedish politicians are increasing their focus on the major industries that drive carbon dioxide pollution, and have raise taxes on district heating in the past couple of years (other recent proposals to increase taxes on district heating were only related to burning waste, and Kraftringen does not use waste as fuel). The company's shift away from fossil fuels has increased investments, resulting in increased costs for end customers. Although Kraftringen has not increased prices as much as others', its district heating tariffs are now more expensive than the average in Sweden according to "Nils Holgersson Rapporten 2019." This said, Kraftringen has not reached their allowed income for regulatory electricity distribution, and therefore have the possibility of transferring under-recovered revenues to the upcoming regulatory period, which is positive for their credit metrics going forward. Daniel Annas
Rosseti PJSC(BBB-/Stable/A-3)  
Rosseti's exposure to ESG risks is comparable to that of peers. The group's subsidiaries provide an important transmission and distribution service with a significant social impact. Consequently, the government sometimes limits tariff increases and assigns Rosseti the unprofitable, but socially important, role of a guaranteeing supplier, or mandates investments in politically important projects--such as developing Russia's Far East, or smart meters. This makes Rosseti's regulated business less predictable but also underpins the state's 88% shareholding in Rosseti and the government's heavy involvement in shaping the company's strategy, and creates incentives for government support. From an environmental standpoint, Russia is less focused on renewable development than most European countries are, and as a result has less of a need for network development to support new, potentially volatile, energy sources. We don't expect this to change in the immediate future. Rather, Rosseti's capex plans for digitalization and electrification of new transport infrastructure in remote regions reflect the government's policy of increasing Russia's GDP growth above the currently modest 1.8%. Elena Anankina
RTE Reseau de Transport d Electricite(A/ Stable /A-1)  
We see RTE's exposure to environmental and social risk as comparable to that of the industry. RTE plays an important role in France's energy transition as it dedicates important capex to integrating renewable sources into the grid. RTE should spend up to €7 billion for the connection of offshore wind parks until 2035, which is about 20% of its total expected investments over the period. This is part of RTE's 2019 network development plan over the next 15 years that still needs to be reviewed by the French energy regulator CRE. We believe that the government's objective, embedded in its 2019-2028 energy program, to reduce France's dependence on nuclear power by 2035 to 50% from 75% while rapidly exiting coal thermal energy, will likely reinforce RTE's prominence in national energy matters. RTE has historically maintained a reliable, safe, and economically viable electricity transmission network, enabling the security of supply across France. This helps the company manage regulatory risk and public opinion, which is important from affordability and social perspectives. RTE continues to invest heavily in network enhancement, maximizing transmission system efficiency, and developing needed interconnection lines (total regulated capex of €1.45 billion in 2018). In addition, the utility has consistently provided high quality standards in its grid management. Governance is key to our rating on RTE. This is because, although EDF owns 50.1 % of the RTE group, we assess the group as operating independently from this main shareholder, notably due to regulatory and legal reasons, and with separate administrative and management teams. The company has had this corporate governance structure for a long time. Claire Mauduit-Le Clercq
SNAM SpA(BBB+/Negative/A-2)  
We see Snam's exposure to environmental and social risk as comparable to that of the industry. Notwithstanding the ongoing energy transition, gas will remain an important part of Italy's energy demand (currently about 35%) and a key energy hub for the Mediterranean area. With about €400 million investment in new businesses in the energy transition until 2023, part of €1.4 billion Snamtec program (Tomorrow’s Energy Co.), Snam aims to promote gas use in various forms, including liquefied natural gas, compressed natural gas for maritime and ground transportation, energy efficiency with third parties (real estate deep renovation); it also aims to support the evolution of green gas, in particular biomethane and hydrogen (blending H2 up to 10% with studies ongoing on asset readiness and power to gas). The company has a good track record of maintaining a high degree of network quality, security, and safety standards, which is a key part of managing regulatory risk. Massimo Schiavo
Societa Metropolitana Acque Torino SpA(BBB-/Positive/--)  
Governance issues resulting from SMAT's shareholder structure constrain the ratings. The major area of governance risks relates to the city of Turin's significant influence over SMAT's strategic directions. The majority shareholder has a track record of taking decisions that could be detrimental to SMAT's credit quality: for example, requesting a special dividend payment in 2016 (not voted by general assembly in 2017), and proposing in 2017 the change of the company's legal status to a public consortium. The board's oversight has somewhat offset this negative influence. Turin can elect three of the five members on SMAT's board. To be passed, general assembly decisions, related to variations among shareholders, need 90% of equity voting rights and the agreement of 60% of the shareholders present, which somewhat reduces the risk of negative intervention. From a social perspective, SMAT's reputation is supported by its good operating track record. Located in the richer northwest region of Italy, Turin's water networks are superior in quality to others' in Italy, with lower water leakage than the country's average. Water quality is in line with standards requested by the regulator for the sector. Pauline Pasquier
Southern Water Services (Finance) Ltd.(Class A: BBB+/Negative/--; Class B: BBB-/Negative/--)  
We see Southern Water Services (Finance) (SWSF) as having weaker management and governance score than the sector following a large breach in management over sight leading to the misreporting of environmental leakage figures to the regulator between 2010 and 2017. On June 25, 2019, the UK water regulator Ofwat announced that it had issued SWSF with a £126 million fine on the basis that it had deliberately misled the regulator on the quality of the treated wastewater that was being released into water sources in Southern Water's operating area. We believe that these findings indicate material deficiencies in SWSF's management and governance policies and general risk in the management framework. Furthermore, we believe SWSF's internal controls were inadequate in preventing or identifying alleged illegal behavior as well as license-breaching behavior. In our view, these have an adverse impact on the company's reputation, regulatory risk, its credit metrics, and its overall credit quality at a time of higher political and regulatory risks. We note that SWSF has implemented a comprehensive action plan to prevent further similar events from occurring. Gustav Rydevik
Statnett SF(A+/Stable/A-1)  
We see environmental and social risks for Statnett as moderate and comparable to those of other transmission system operators (TSOs). Stattnet's Norwegian home power market is already close to 100% relying on hydro, which we expect to remain the backbone of the nation's energy supply. Statnett is involved in NordLink and North Sea Link, which are sizeable and complex interconnector projects. This is part of the company's role in ensuring security of supply and balancing the North European system, which is increasingly reliant on volatile renewable generation. Statnett has an excellent track record in terms of project execution. Although, we note that the company's projects are exposed to high-risk environment situations, such as steep mountains and underwater (fjords), it has a good health and safety record, and regularly reviews procedures. Daniel Annas
Stockholm Exergi Holding AB (publ)(BBB+/Stable/A-2)  
Environmental risks are more of a credit factor for Stockholm Exergi than for electric network peers. This is because the company's district heating activities consume fuel related to the heat and combined heat and power plants, resulting in carbon dioxide discharge. Stockholm Exergi has reduced its carbon dioxide footprint by about 65% since 2002, mainly thanks to a shift from fossil fuels to biofuels and more efficient technology. Although the company is still one of Stockholm's largest dischargers of carbon dioxide, and emissions increased in 2018 compared with 2017, it intends to phase out coal by the end of 2020 and be environmentally neutral by 2030. These targets have resulted in a significant investment plan in the coming years, for example conversion to renewable fuels in existing and new plants, as well as technology to filter the emissions but also with projects such as bio-energy with carbon capture and storage. We assess Stockholm Exergi's management and governance as satisfactory. The company and its previous main coal supplier were however mentioned in reports of the Swedbank money laundering scandal in 2019. Its main coal supplier had suspected ties to sanctioned individuals, according to Swedish broadcaster SVT's investigation. This could potentially lead to fines or a loss of customers for Stockholm Exergi if the allegations turn out to be true. We currently do not expect this to materially affect our credit rating on Stockholm Exergi. Daniel Annas
Tekniska verken i Linkoping AB(A+/Stable/A-1)  
We see Swedish multi-utility TvAB as having comparable environmental and social risk to that of industry peers. Its owner, the municipality of Linköping, aims to become carbon-dioxide neutral by 2025. This is reflected in TvAB's recent strategic change to invest in wind generation, and to phase out fossil-based fuels for its CHP plants in the coming years. In our view, TvAB should be able to execute on its strategy without a major impact on its business risk. The strategic change does not affect the regulated business, which accounts for about 80% of EBITDA. TvAB's strategy is to be a resource-efficient company, and to have an attractive services offering for the environmentally aware inhabitants of its region. This should help preserve its social license to operate, while optimizing its regulatory relationship. TvAB ranks well against Swedish peers in both outage and price comparisons. We expect TvAB to be able to maintain its good rankings for district heating, electricity, waste and water services as it transitions way from fossil fuels.
Terna SpA(BBB+/Negative/A-2)  
Terna's ESG exposure is comparable to that of peers. As Italy's electricity TSO, Terna has also been an early adopter of significant renewables capacity in its network. We thus believe it benefits from significant expertise in increasingly complex grid management amid Italy's energy transition. Terna intends to invest more than 10% of its domestic capex (€6.2 billion) into innovation and digitalization to fulfill the Italian government's target of reaching 26.8 gigawatts (GW) of solar and 15.7 GW of wind installed capacity by 2025. The company has a good track record of maintaining a safe and reliable electricity transmission network as well as a sound relationship with the regulator, ARERA. From a governance perspective, Terna, like its regulated peers, has historically been subject to political interference attempts via the so-called Robin Hood tax. This proposed one-off 6.5% income surtax was ultimately ruled unconstitutional by the European Court and withdrawn. (Terna is partly owned by the Italian government). Massimo Schiavo
Thames Water Utilities Ltd.(Class A: BBB+/Negative/--; Class B: BBB-/Negative/--)  
Thames Water has higher exposure to ESG risks than the industry in general. Along with some other water companies in the U.K., it has been under public pressure for underinvesting in aging assets and paying perceived excessive dividends, ultimately underperforming in its key social duty of providing quality water services. The U.K. water regulatory framework incorporates operational guidance for environmental efforts. Despite its substantial proactive measures to improve operating performance, the company has continued to miss several of its regulatory targets. These relate to leakages, below-ground water-asset health, supply interruptions, and security of supply. In this respect, we believe Thames Water's operating performance lags those of other U.K.-regulated water companies. In light of the above, we assess Thames Water's management and governance as fair only and weaker than peers'. Management has however taken some proactive steps. To enhance transparency and in response to ongoing political pressure and negative press coverage, Thames Water has closed its Cayman finance subsidiaries and replaced them with a U.K.-based entity. In addition, the company has strengthened its board's independence, while significantly cutting dividends, mitigating some governance risks. Matan Benjamin
Transnet SOC Ltd.(BB/Negative/--; zaAA/--/zaA-1+)  
We see Transnet's management and governance as fair, and more exposed to governance factors than domestic peers'. Transnet's former board and executive team have been accused of significant governance failures and irregularities, most notably in procurement. Such charges are being investigated, as well as allegations that certain government officials tasked to oversee Transnet's governance were complicit in the governance procurement irregularities. Furthermore, Transnet's 2018 and 2019 financial statements received audit qualifications (notably related to auditors' inability to confirm accuracy of reporting in relation with legislative requirements, not IFRS) and publication of the 2019 results were delayed, raising the risk of listing-requirement breaches, and broadly sterilizing Transnet's ability to raise public debt in calendar 2019. Consequently, governance risk remains elevated and we continue to monitor possible leadership and motivational challenges stemming from these issues, as well as the trajectory of board effectiveness, internal controls, reporting transparency, and regulatory relationships. These governance deficiencies have not, to date, resulted in a rating action, given that investigations and remediation plans and actions are well advanced and have not resulted in poor operational performance. Environmental and social considerations for Transnet are broadly in line with those of industry peers, reflecting the company's broadly acceptable service delivery and management of regulatory risk and public opinion, supported by its monopoly position in several markets. Transportation infrastructure providers are seen to have moderate environmental exposure reflecting the indirect exposure to emissions and pollution of the transportation industry itself. From a social perspective, the impact on local communities in relation to lifestyle, congestion, noise, and air quality is being increasingly highlighted, but the critical nature of existing road, airport, and port operations leads us to see these risks as limited for existing operations. Omega Collocott
Vodokanal St. Petersburg(BB+/Stable/B)  
Vodokanal is weaker than peers' on governance. After the St-Petersburg Controlling Chamber concluded the company had included inappropriate costs in tariff calculation, its 2019 tariff increases were curbed at 3.7% and certain top managers were replaced. Our rating also factors in Vodokanal's exposure to politicized decision-making, including caps on tariffs, as well as potential support from the city government, including co-financing of investment projects. From the social and environmental standpoint, Vodokanal is comparable to other water utilities. It's a monopoly business responsible for water supply and water treatment in Russia's second largest city and suburbs. The company therefore invests heavily in the construction of wastewater treatment facilities, Okhtinsky sewage collector, and modernization of the wastewater treatment plant at Severnaya. Sergei Gorin
Zagrebacki Holding d.o.o.(B+/Stable/--)  
Zagrebacki's social exposure is very high compared with peers' based on the group's omnipresence in the city of Zagreb. In our view, Zagrebacki plays an important role to the city of Zagreb by providing essential services in many industries (energy, waste, pharma, real estate, leisure…) that must remain affordable and reliable. We assess management and governance as fair despite strong support from the key shareholder to invest in infrastructure, reflecting the very strong influence of the city in the company's key strategical decisions. Zagrebacki's environmental exposure is comparable to regulated peers with 90% of its EBITDA stems regulated activities (including gas distribution, gas and water supply as well as water and waste treatments). Renata Gottliebova
Ratings as of Feb. 11, 2020. Source: S&P Global Ratings.
North America

Table 2

Company name/Ratings/Comments Analyst
AltaLink L.P. (A/Stable/--)  
As a transmission-only company, ALP's exposure to environmental risk is quite manageable and in line with that of electric utility network peers. From a social perspective, the provincial Canadian utility has a strong track record of providing safe and reliable electricity transmission services. In addition, the utility implemented a number of rate-relief measures to lower costs for customers amid sluggish economic conditions in Alberta. Mayur Deval
American Water Works Co. Inc. (A/Stable/A-1)  
We view American Water Works as having comparable environmental and social risk as the broader industry for water and wastewater utility services. The company's long track record of providing safe and reliable water services to its customers could enable it to maintain social cohesion, despite steadily increasing rates and charges to the customer. That said, affordability will remain an area that we watch closely. The company is a good steward of the environment and adheres to federal and state water-quality regulations. Sloan Millman
ATCO Ltd. (A-/Stable/--)  
We see ATCO's ESG related exposure as similar to the broader industry. The company is primarily an electric and gas distributor in Alberta. From an environmental perspective, ATCO recently divested all of its fossil-based generation assets in Canada; hence the company's environmental exposure to greenhouse gas emission has reduced significantly. From a social perspective, ATCO, through its regulated subsidiary, has a long history of providing affordable, safe, and reliable gas and electric utility services to its customers, consistent with the broader industry. Andrew Ng
CenterPoint Energy Inc. (BBB+/Stable/A-2)  
CPE's credit quality is more negatively influenced than global peers by environmental factors. This is because of higher inherent risks in natural gas distribution operations and its midstream operations; as well as because of coal-fired power generation exposure. CPE's gas business includes approximately 76,000 miles of distribution mains combined with its gathering, processing, and transportation operations; this exposes it to a number of environmental risk factors (such as decommissioning of former manufactured gas plant sites and the risk of gas leaks). The electric segment further exposes CPE to environmental risk since approximately 1,300 MW of generation capacity is fossil fuel-based and of this about 75% is coal-based. We believe CPE's plan to transition its generation portfolio away from coal and toward natural gas will require significant investment and help lower the risks. On social risk factors, we see CPE as having a track record of providing affordable, safe, and reliable operations, which are critical to maintain robust regulatory relationships. The company has performed in line with the broader industry. Gerrit Jepsen
Consolidated Edison Inc. (A-/Stable/A-2)  
We see social risks as a more material ESG factor for the company than for most peers'. Given Con Ed's position as the electric and gas distribution provider in New York City, events involving its operations tend to receive heightened public scrutiny due to the city's high population density. Aside from this, Con Ed's internal safety and health management systems support its ability to provide safe and reliable service for its customers, despite the complexity associated with its system. Con Ed environmental risk is not materially different from that of peers. While it has some steam-generation operations, the vast majority of the company's operations are in regulated electric and gas transmission and distribution. Sloan Millman
Energir Inc. (A/Stable/--)  
Energir is primarily a gas distributor but also owns an electric regulated transmission and distribution network. We believe Energir's environmental risk is consistent with the broader industry because the company's gas network is fairly new and does not contain cast-iron or bare-steel pipes which raise the risk of explosions. In addition, the company also participates in Quebec's cap-and-trade system (that it shares with California), to reduce its greenhouse gas footprint in the gas distribution operation. From a social perspective, Energir has a history of providing affordable, safe, and reliable gas and electric utility services to its customers, consistent with the broader industry. Andrew Ng
Eversource Energy(A-/Stable/A-2)  
Eversource's exposure to environmental risk in its electric operations is comparable with that of other transmission and distribution (T&D) operators. Even though the company is venturing into building generation assets, these are offshore wind assets that do not have an extensive carbon footprint. Eversource's water utility subsidiary largely depends on the natural resources surrounding its service territory. This requires the group to be good stewards of the environment while adhering to all federal and state water quality regulations. Such stewardship will remain a key mandate for the group, in our view. Eversource is subject to environmental remediation liabilities associated with several manufactured gas plants (MGP) sites. However, the cost of cleanup is estimated to be immaterial and is likely to be recoverable through the regulatory process. In addition, the company's gas operations are exposed to environmental risks in the normal course of business because of the potential for the company to emit methane. We view the company's ongoing infrastructure replacement program, where it spends significant capital to replace aging natural gas lines that may be prone to leaks, as supporting its preparedness, should regulations governing methane emissions become restrictive. From a social perspective, we view Eversource's long track record of providing safe and reliable utility services to its customers as a key factor that could enable it to maintain social cohesion going forward, even though affordability of steadily increasing rates and charges to the customer remains an area that we continue to watch closely. Obioma Ugboaja
FirstEnergy Corp. (BBB/Stable/--)  
We view FirstEnergy's environmental risk as only modestly higher than that of pure network peers, given the company's exposure to coal-fired generation assets. Over 90% of the company's assets are transmission and distribution, significantly reducing its exposure to environmental risks. However, about 80% of the company's 3,790 MW of generation capacity is from coal and exposed to heightened risks. While the company has committed to significantly reduce its carbon emissions, this goal is only very long-term, i.e. by 2045. Matt O'Neil
Fortis Inc. (A-Negative/--)  
While Fortis is primarily engaged in regulated activity, the company is more negatively influenced by environmental factors than pure network peers'. This is because of some exposure to fossil fuel-based generation (5% of assets, through Tucson Electric Power [TEP]). TEP produces most of Fortis' fossil-based generation and associated greenhouse gas (GHG) emissions. In order to reduce Fortis' environmental footprint, TEP is focusing on reducing its GHG emissions by decreasing its reliance on coal generation and replacing it with a mix of efficient natural gas and renewable generation. In 2018, gas and renewable energy represented about 40% of TEP's energy mix while coal represented about 43% (down from 79% in 2014). By 2030, TEP's goal is to have gas and renewable representing about 57% of its retail energy mix with coal representing only about 38%. From a social perspective, we see Fortis as having a history of providing affordable, safe, and reliable gas and electric utility services to its customers, consistent with the broader industry. Andrew Ng
Hydro One Ltd. (A-/Stable/--)  
We see the credit quality of Hydro One Ltd. ([HOL] and subsidiary Hydro One Inc.) as more negatively influenced than global peers by its ownership and governance structure, resulting in our assessment of its management and governance as fair only. Specifically, HOL is partly owned by the government of Ontario and the government could potentially exercise legislative power to promote its own interests and priorities above those of other stakeholders. The Ontario government recently passed an amendment to the Ontario Energy Board Act to exclude any compensation paid to HOL's CEO and other senior executives from consumer rates. We view this legislative action as a governance deficiency related to HOL's ownership structure since the Ontario Province exercised its legislative authority to lower electricity rates, consistent with the government's election campaign promises. In our view, the use of this legislative authority to influence HOL's compensation structure for executives undermines the effectiveness of the company's governance structure, and potentially promotes the interests and priorities of the Ontario government above those of other stakeholders. We also note that these events followed the 2018 resignation of HOL's entire previous board of directors. Additional interferences in HOL's business or operating decisions could weaken the company's governance, reflecting severe deficiencies. From a social perspective, HOL has a history of providing affordable, safe and reliable electric utility service to its customers, consistent with the broader industry. Andrew Ng
PPL Corp.(A-/Stable/A-2)  
PPL's credit quality is more negatively influenced than global peers by environmental risk factors given that being a Kentucky-based coal generator increases environmental risks of a mostly network based business. Please see LG&E and KU Energy LLC., and Kentucky Utilities Co. for further details. Gerrit Jepsen
Toronto Hydro Corp. (A/Stable/--)  
We see Toronto Hydro's ESG related exposure as similar to the broader industry. The company is a pure electric distribution operator. From a social perspective, Toronto Hydro has a history of providing affordable, safe, and reliable electric utility service to its customers, consistent with the broader industry. Andrew Ng
Ratings as of Feb. 11, 2020. Source: S&P Global Ratings.
Latin America

Table 3

Company name/Ratings/Comments Analyst
Companhia de Saneamento Basico do Estado de Sao Paulo (BB-/Stable/--, brAAA/Stable/--)  
We see SABESP as more exposed to environment risks than peers' because of the operational and financial challenges that the Brazilian water utility may face due to extreme climate events. SABESP relies on water availability in its reservoirs to supply its clients. The impact of extreme climate-related events may have critical consequences to the company and the people within its area of influence. For example, in 2014 SABESP's main reservoir was affected by a significant drought that forced the utility to take several measures to control water consumption throughout the state of Sao Paulo, such as reduced water pressure that resulted in water supply stoppage in some areas. SABESP also offered discounts to customers in order to encourage water consumption savings. These events hurt the company's credit metrics at the time. SABESP also needs to adhere to extensive Brazilian federal, state, and municipal laws and regulations that aim to protect human health and the environment. Vinicius Ferreira
Ratings as of Feb. 11, 2020. Source: S&P Global Ratings.
Asia-Pacific

Table 4

Company/Rating/Comment Analyst
China Southern Power Grid Co. Ltd.(A+/Negative/--)  
We see environment and social risks for CSG as broadly similar to State Grid of China, the other major grid operator in the country. CSG strives to maintain reliable, safe, and efficient grids to serve the economic and social development in the five southern provinces in China, which in total account for 18% of the national population. It has a satisfactory operational track record, and continuously improves the quality of power supply services. CSG plays a significant role in dispatching clean energy from the west to the east. In 2018, it achieved 51.5% electricity generation from non-fossil fuel energy in its service area, much higher than the national average of 29.6%. The company has constructed multiple long-distance ultra-high voltage transmission lines to dispatch surplus hydro and wind power from the less populated areas in the west to load centers in the coastal region. As one of the backbone state-owned companies in China, CSG also undertakes social responsibility through actively participating in the poverty alleviation in the rural areas. In 2018, it invested Chinese renminbi (RMB) 23.7 billion (US$3.4 billion) in poverty alleviation in the electric power industry through building up networks and supplying electricity to the rural or impoverished areas. Gloria Lu
State Grid Corp. of China(A+/Stable/--)  
SGCC aims to maintain a reliable, safe, and economic network to manage social stability and regulatory risks. As the world's largest power grid operator, SGCC supplies electricity to over 80% of China's population and maintains a satisfactory operational track record. Its environment and social risks are moderate. Managing grid reliability is becoming more challenging with the company's increasing intake of intermittent wind and solar power. SGCC plays a significant role in dispatching renewable energy in China and helping the government achieve its goal of having 20% of primary energy sourced from renewables by 2030. It has constructed multiple long-distance ultra-high voltage transmission lines to dispatch renewable energy to consumption bases in the east. We expect SGCC will continue to spend RMB450 billion-RMB500 billion annually on network construction and upgrades and also undertake critical social responsibility in building up networks and supplying electricity to the rural or impoverished areas in China. The company usually receives government subsidies (RMB15 billion-RMB20 billion annually) to compensate for these costs. Apple Li
ETSA Utilities Finance Pty Ltd.(A-/Stable/--)  
ETSA, the electricity distributor in the state of South Australia, has comparable social risks to its peers. The company manages its stakeholder engagement appropriately, having engaged in customer consultation when developing its draft proposal for the 2020-25 Regulatory Period for the Australian Energy Regulator. The company has also responded to the desire of the community for a wider role for renewable power and distribution by incorporating a third element, "Transitioning to the new energy future," into its strategy. Alexander Dunn
SGSP (Australia) Assets Pty Ltd.(A-/Stable/--)  
As a predominately energy transmitter and distributor, SGSPAA's environmental and social risks are relatively benign and comparable to network peers. With a footprint across multiple eastern and northern states of Australia, the company's social factors include providing reliable and safe electricity and gas networks in its service area. We believe that the company is well experienced with an established track record. Sonia Agarwal
Ratings as of Feb. 11, 2020. Source: S&P Global Ratings.

This report does not constitute a rating action.

Primary Credit Analysts:Pierre Georges, Paris (33) 1-4420-6735;
pierre.georges@spglobal.com
Claire Mauduit-Le Clercq, Paris + 33 14 420 7201;
claire.mauduit@spglobal.com
Gabe Grosberg, New York (1) 212-438-6043;
gabe.grosberg@spglobal.com
Beatrice de Taisne, CFA, London (44) 20-7176-3938;
beatrice.de.taisne@spglobal.com
Aneesh Prabhu, CFA, FRM, New York (1) 212-438-1285;
aneesh.prabhu@spglobal.com
Julyana Yokota, Sao Paulo + 55 11 3039 9731;
julyana.yokota@spglobal.com
Gloria Lu, CFA, FRM, Hong Kong (852) 2533-3596;
gloria.lu@spglobal.com
Parvathy Iyer, Melbourne (61) 3-9631-2034;
parvathy.iyer@spglobal.com
Richard Timbs, Sydney (61) 2-9255-9824;
richard.timbs@spglobal.com
Abhishek Dangra, FRM, Singapore (65) 6216-1121;
abhishek.dangra@spglobal.com

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