The credit quality of European utilities is likely to be more resilient to the effects of COVID-19 than many other sectors, says S&P Global Ratings in a new report, EMEA Utilities Should Withstand COVID-19 Better Than Most Sectors.
“We currently expect only a limited number of rating downgrades in the sector given the essential service they provide, the regulated or long-term contracted nature of a portion of their activities, and their relatively better access to capital markets,” said S&P Global Ratings credit analyst Pierre Georges.
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Nevertheless, the pandemic and recent oil price collapse have triggered a wider economic shock and uncertainties over the timing of a recovery, thereby increasing earnings risks for utilities with large exposure to merchant power activities.”
Georges noted an anticipated decline in demand that will affect both generation and supply, which may require some flexibility from shareholders in the months ahead saying, “We expect power demand to decline by 5%-7% this year on 2019 and power prices to be down 20% in 2021 from our previous assumptions.”
“This will affect earnings on generation and supply activities, while regulated networks are better protected. Lower investments in 2020, and eventually some flexibility on dividends may ease pressure on credit metrics.”
“More generally, we see weaker macroeconomic fundamentals affecting ratings on utilities, owing to political and commercial pressure to support weaker customers and suppliers, increased sovereign risk, and in certain cases refinancing challenges.
“We also see increased risks that pension and asset-retirement obligation deficits will widen, which could weaken the credit health of some companies,” Georges said .
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