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EMEA Utilities Should Withstand COVID-19 Better Than Most Sectors

EMEA Utilities Should Withstand COVID-19 Better Than Most Sectors

The European utilities sector has so far been more resilient to the economic effects of COVID-19 than most other corporate sectors. This is because of the essential service that utilities provide, the regulated nature of their network business activities, and the largely hedged or contracted nature of their power generation for 2020. Most generators in Europe hedge a large part of their merchant power exposure at least a year ahead. What's more, most companies we rate in Western Europe have reduced their merchant power exposure in recent years, turning instead to long-term fixed-price renewables. On average, we estimate that European integrated utilities maintain an exposure to merchant power generation of about 15%-25% of EBITDA.

Operationally, most utilities have developed and unveiled contingency plans to manage such a disruption and protect critical infrastructure. We therefore do not foresee any disruption in the network operations or any risks related to continuity of supply. Measures include team rotations, reduction of staffing needs to critical services, and use of digitalization to work remotely, when feasible. We understand that such reorganization of work can be sustained over prolonged periods of several weeks or months. We also believe that 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.

Nonetheless, we now see additional pressure building on utilities, as European governments take drastic measures to fight the virus with population containment strategies and as the world enters a prolonged period of economic slowdown. Some government authorities estimate the pandemic will peak between June and August, and we are using this assumption in assessing the economic and credit implications. We believe measures to contain COVID-19 have pushed the global economy into recession and could cause a surge of defaults among nonfinancial corporate borrowers (see our macroeconomic and credit updates here: As the situation evolves, we will update our assumptions and estimates accordingly. We now forecast Europe will enter a recession for 2020 and see further economic risks arising in the following year, notably with a potentially rapid appreciation of the euro and further economic slowdown in other regions.

In this context, we see several factors that could affect the performance and creditworthiness of utilities, as follows.

Weaker power demand and weaker power prices amid commodity price falls.   While not an imminent risk given companies' hedge positions, recovery of power prices may take time, notably if commodity prices remain low for some time.

Lack of timely payment of power bills.   We now envisage that political or commercial pressure may lead to payment deferrals or discounts on power bills to keep some weaker customers afloat in the current economic stress situation. Bad debt provisions could also increase materially for retail operations. For countries with weaker regulatory systems, it remains to be seen whether increased bad debt provisions are compensated via future tariffs or represent an effective mandate on regulated utilities. Additionally, we anticipate that utilities may need to support some of their weaker contractors over this lockdown period to avoid a liquidity crunch. All of this will weigh on working capital requirements.

Lower investment spending than previously planned (down 10% to 15%).   This is due either to supply-chain disruptions or slowdowns in decision-making or permitting processes. The ambitious investment plans set by the sector to accelerate the energy transition may also be scaled down to preserve cash. At this stage, however, we have not seen any signal that governments may reprioritize budget allocations to the detriment of the energy transition.

An increase in pension and asset-retirement obligation deficits.   This may also affect the economic debt of the utilities. This is because actuarial assumptions may increase liabilities and underperformance of dedicated financial assets can increase the deficit.

Refinancing risks for weaker companies.   This is because liquidity may become less available and the cost of financing has soared in recent days, notably for noninvestment-grade companies or utilities in lower-rated countries. At the same time, we believe utilities are generally well placed to benefit from some forms of government support, given their relationships with governments and local banks, as well as their economic and social importance for economies.

Possible sovereign downside risk for some utilities, particularly in Italy and oil-producing countries (such as Azerbaïdjan or Kazakhstan).   The ratings on some utilities are either linked or capped by ratings on respective sovereigns, or because of risks associated to currency fluctuations, the health of local banking systems, and the general business environment.

Chart 1


Power Demand And Power Prices: The Most Obvious Risk

Power prices have been quite low since the beginning of the year compared to our long-term base case. Until now, this was due to a very mild winter across the continent (the warmest winter ever in many countries) combined with strong output from renewables, including good wind conditions and high hydro levels. This was exacerbated in the Nordics, where Nord Pool prices have been at extremely low levels since January (see chart 2).

Weaker global economic growth spurred weaker demand for coal and gas, while European carbon prices have been decreasing. Additionally, the oil price war launched in early March by Saudi Arabia crashed oil prices. All these factors combined led us to lower our forecast for commodity prices, and we see this already reflected in European power price curves. Carbon prices are also following this negative trend, reaching levels below €18 euros per ton of CO2, from about €25 last year. In some markets, the one-year forward power prices are now trading at levels close to the lows we saw in 2016, when utilities' earnings were badly hurt.

Chart 2


Chart 3


Most power generators we rate almost fully hedged their positions for this year during the course of 2019, in most cases at still relatively high price levels. We therefore anticipate the price impact will be relatively marginal on 2020 results for most of them. Guidance provided by utilities since the beginning of the year as part of their full-year announcements so far point to this conclusion. For 2021, we believe the story still needs to be written in many cases. Forward prices remain well above current spot prices, but about 20% below our previous base-case assumptions. Hedging positions are less secured for next year, with only about 30%-50% generally contracted on average. This leaves 50%-70% that still need to be covered in this lower price environment. While utilities still have time to decide on the best approach, the lower economic prospects and likely sustainably subdued commodity prices do not advocate for a strong rebound in power prices during the second half of 2020. We therefore may see higher negative pressure on earnings next year for companies with large merchant baseload exposure, notably hydro and nuclear.

These include particularly companies such as EDF, Fortum, Uniper, Statkraft, Vattenfall, Verbund, or CEZ. We already have a negative outlook on Fortum, EDF, and Uniper. We will assess whether the lower financial leverage on the remaining players allow for such a temporary downward pressure on earnings.

The recession that we now expect for Europe in 2020 and the lower economic growth prospects for the following year will also likely dampen power demand. Many industrials have temporarily shut down their plants (for example, in the auto and capital goods sectors), leading to a significant drop in demand during the lockdown period, with a demand decline estimated at between 15% and 25%. We do not believe that this decline can be fully recovered during the course of the year. Prior to the emergence of COVID-19, we were already anticipating flat to slightly declining demand in Europe, as the focus on energy savings among customers--from residential to heavy users--is outpacing any increase from economic or demographic growth or electrification efforts at this stage. Further macroeconomic weakness would only exacerbate this trend. Demand decline from office shutdowns and lower industrial output will only be partially offset by higher residential demand as people stay more at home. We believe this could be detrimental to volumes produced, notably for generators of higher-cost baseload and marginal sources of energy (including gas).

At this stage, we consider that a 5%-7% decline in volumes for 2020 compared to 2019 is a probable scenario in Europe, with Northern Europe being more affected than Southern Europe due to weather conditions. Contrary to lower prices, lower volumes could affect cash flows as early as this year. Here again, the companies most exposed are the utilities that have the higher exposure to noncontracted power generation. For the power retail operations, this may mean that utilities are overhedged and will need to reduce their exposure. We expect losses from this in 2020.

Payment Collection Risk: The Emerging Threat?

European governments have so far accompanied their drastic containment measures and forced closures of certain businesses with promises of certain forms of compensation to avoid an acceleration of defaults. Yet, we believe it likely that utilities will also be asked to take measures for some of their weaker customers to avoid liquidity stress. We believe some governments could require utilities to maintain access to water, gas, and electricity even in case of nonpayment, and could encourage bill collection delays to ease liquidity concerns. This is already the case in France. We also consider it possible that utilities might also proactively propose such installments or discounts to keep their customers afloat.

Such scenarios could lead to a rise in utilities' debt because working capital requirements could increase massively as a result. We recognize that working capital needs generally peak during the winter season and start to decrease as spring comes and payments are made. It is therefore likely that we do not see a major increase in debt over the coming months from utilities. However, we will not see the typical decrease at that time of year, either. While temporary, this would be negative for credit metrics, and the recovery of working capital outflows could take time. If the extent of this outflow becomes material, some governments may also provide some kind of support, including government-backed liquidity lines. Yet, such measures have not been announced at this stage.

Chart 4


In the event of a rise in default rates in Europe due to the COVID-19 situation, we believe bad debt provisions may increase significantly and utilities' inability to recover a portion of the bills could lead to weaker financial results. Utilities exposed to significant business retail activities, notably in weaker economies, could be negatively affected, in our view. These include EDF, Centrica, Enel, EON, and Iberdrola, in particular, in Western Europe.

Nonetheless, we do not expect payment collection for regulated networks to be affected at this stage. We will continue to monitor the situation, however, because this could become a more important consideration should the situation worsen. In the CIS, where regulatory regimes are generally weaker, it remains to be seen whether lower revenues and weaker payment collection will be compensated via future tariff adjustments. We see the risk that the governments and regulators may effectively put part of the COVID-19 cost burden on regulated utilities.

Lower Investments Will Likely Support Credit Metrics In The Short Term

We see significant risks that capex will decline materially from utilities' previous plans as they focus on their priority projects. At this stage, we estimate that a 10%-15% reduction in investments in 2020 is a likely scenario. On the one hand, this will help preserve cash, which we view as credit-positive. Yet, it will also likely delay earnings' growth trajectories and, more importantly, may create some operational challenges such as longer maintenance outages on production assets (like nuclear plants) or lower profitability of projects (such as offshore wind developments).

Population containment and some disruption in industrial output will likely lead to some delays ambitious development programs from European utilities. Weaker activity by suppliers and lower availability of staff and contractors due to forced containment will force utilities to focus on essential projects and postpone a large part of their discretionary investments. Notably, large projects generally start at this time of year (after the winter period). It is now likely that utilities will postpone some projects by up to a year because order books from contractors are already full for the rest of the year.

We also believe M&A transactions are likely to be postponed as management teams focus on their core businesses and because asset valuations become volatile in such an environment. For offshore wind projects, where timeliness and sequencing of operations during the construction phase are key success factors, we have not seen any negative signal for now, but we recognize that the situation is evolving rapidly.

Longer decision-making processes in a more uncertain environment, or longer permitting times given the lower availability of administrations could also contribute to lower investment.

A more questionable topic is whether the current macroeconomic conditions and promises from the governments to support the European economy could shift the billions from energy transition efforts to more social spending. This could result in lower or delayed support to growth in renewables, contrary to the recently signed European Green Deal. While there is no evidence of this at this stage, we will closely monitor the situation and government decisions.

Pensions And Asset Retirement Obligations: The (Not So) Hidden Threat

Many European utilities bear material pension liabilities and asset-retirement obligations. While they also manage plan assets to offset part of these liabilities, we see major risks related to the corresponding deficit. More precisely, we consider the current deficits could widen on the back of two developments. First, these liabilities may increase as a result of lower discount rates going forward. Second, the plan assets could decrease because of the significant decline of the stock markets over the past weeks. We believe that, in some cases, the increase of the deficit could be very material and have implications for our adjusted credit metrics.

In our view, the companies that could be affected most from these negative developments include EDF, EON and ENGIE. Should this this situation materialize and continue, companies with stressed credit metrics for the current ratings will feel additional pressure, especially if they effectively need to post additional collateral to compensate for the additional deficit.

Refinancing Risk: Not Material, But Exceptions Exist

European utilities generally have adequate or strong liquidity profiles, with high levels of cash on the balance sheet, significant committed, unrestricted, and available credit lines, and well spread debt maturity profiles. On top of these positive features, they generally enjoy good access to financial markets and good financing conditions. Recent financing transactions post the emergence of COVID-19 in Europe achieved still good conditions (Vattenfall, Cadent). We now expect that access to the market will be more difficult but not closed for highly rated issuers. Also important to note, the current situation is not a banking crisis, and liquidity from the banks remains available, notably for such highly rated companies.

Chart 5


We nevertheless see some specific cases in which refinancing could be more challenging. These include lower-rated utilities with large refinancing needs this year, or companies that operate in lower-rated countries such as Georgia or possibly Lithuania. While access to capital markets may become more challenging or the cost of financing may become too expensive, we believe that some form of support from the local banks or government could help manage a short-term financing need, given the generally strong links and importance for local economies.

Sovereign Rating Constraints May Hurt

Last but not least, many rated European utilities have strong links with their governments and economies. As such, the ratings can be strongly linked to those on the sovereign, either to reflect the likelihood of exceptional support that these governments can provide in case of stress or because the sovereign rating represents a certain cap on creditworthiness for these utilities, as is the case in Italy.

If sovereign ratings are lowered because macroeconomics deteriorate too dramatically or because governments increase their budget deficits in response, some ratings on utilities may also be lowered as a result. The likelihood of state support could also change if governments change their policy priorities from supporting state-owned enterprises to supporting customers, and utilities could bear part of the burden. An indirect impact may also include foreign exchange (FX) risk for companies with large FX-denominated debt, liquidity pressures if the quality of the local banking system weakens, or general conditions of doing business deteriorate.

We summarize below the utilities we see as most at risk in case of a sovereign rating downgrade.

Table 1

Utilities Potentially Affected By A One-Notch Sovereign Downgrade
Utility Country SACP* Likelihood of support Long-Term ICR§ Government Long-term foreign currency government/sovereign rating

Energie Steiermark AG

Austria a- Moderate (+1 notch) A/Stable State of Styria AA/Stable


Austria a- Moderate (+1 notch) A/Stable State of Lower Austria AA/Stable

Azerenerji JSC

Azerbaijan b- Extremely high (+4 notches) BB/Stable Azerbaijan BB+/Stable

Zagrebacki Holding d.o.o.

Croatia b- Very high (+2 notches) B+/Stable City of Zagreb BB/Stable

CEZ a.s.

Czechia bbb Moderately high (+2 notches) A-/Stable Czech Republic AA/Stable

Georgian Oil and Gas Corp. JSC

Georgia b+ Very high (+1 notch) BB-/Stable Georgia BB-/Stable

Public Power Corp. S.A.

Greece ccc+ Moderate (+1 notch) B-/Stable Greece BB-/Stable

Electricity Supply Board

Ireland bbb+ Moderately high (+1 notch) A-/Stable Ireland A+/Stable

Gas Networks Ireland

Ireland a- High (+1 notch) A/Stable Ireland A+/Stable


Italy bbb+ Extremely high (no impact) capped by Italy (-1 notch) BBB/Negative City of Milan BBB/Negative


Italy a- Moderately high (no impact) ROS (-1 notch) BBB+/Negative Italy BBB/Negative

Terna SpA

Italy a- Moderate (no impact) ROS (-1 notch) BBB+/Negative Italy BBB/Negative

Kazakhstan Electricity Grid Operating Co. (JSC)

Kazakhstan bb- High (+2 notches) BB+/Stable Kazakhstan BBB-/Stable


Kazakhstan bb Moderately high (no impact) BB/Stable Kazakhstan BBB-/Stable


Kazakhstan bb High (no impact) Strategically important (-1 notch) BB/Stable Kazakhstan BBB-/Stable

Ignitis Group UAB

Lithuania bbb Moderately high (+1 notch) BBB+/Negative Lithuania A/Stable

N.V. Nederlandse Gasunie

Netherlands a High (+2 notches) AA-/Stable Netherlands AAA/Stable

Atomic Energy Power Corp. JSC

Russia bbb- Very high (no impact) BBB-/Stable Russia BBB-/Stable

Federal Grid Co. of the Unified Energy System

Russia bb+ High (+1 notch) BBB-/Stable Russia BBB-/Stable

Interregional Distribution Grid Company of Centre PJSC

Russia bb Moderate (+1 notch) BB+/Stable Russia BBB-/Stable

Moscow United Electric Grid Co. PJSC

Russia bb Moderate (+1 notch) BB+/Stable Russia BBB-/Stable

Mosenergo PJSC

Russia bbb- N/A BBB-/Stable Russia BBB-/Stable

Mosvodokanal JSC

Russia bbb- Very high (no impact) BBB-/Stable City of Moscow BBB-/Stable

Rosseti PJSC

Russia bb High (+2 notches) BBB-/Stable Russia BBB-/Stable

RusHydro PJSC

Russia bb+ High (+1 notch) BBB-/Stable Russia BBB-/Stable


Russia bbb- N/A BBB-/Stable Russia BBB-/Stable

Vodokanal St. Petersburg

Russia bb Very high (+1 notch) BB+/Stable City of St Petersburg BBB-/Stable

Tekniska verken i Linkoping AB

Sweden bbb+ High (+3 notches) A+/Stable City of Linköping AA+/Stable
*Stand-alone credit profile. §Issuer credit rating. Source: S&P Global Ratings.

Related Research

  • COVID-19 Credit Update: The Sudden Economic Stop Will Bring Intense Credit Pressure, March 17, 2020

This report does not constitute a rating action.

Primary Credit Analyst:Pierre Georges, Paris (33) 1-4420-6735;
Secondary Contacts:Beatrice de Taisne, CFA, London (44) 20-7176-3938;
Elena Anankina, CFA, Moscow (7) 495-783-4130;

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