The outlook for European, Middle Eastern and African (EMEA) electric and gas utilities remains moderately negative, Moody’s Investors Service said in a new Industry Outlook. While fundamentals continue to be strong, merger and acquisition (M&A) activity is likely to continue and capital expenditures are expected to increase.
“In general, the financial health of the companies remains robust, and they have the ability to generate strong cash flow at the Funds from Operations level,” said Helen Francis, a Moody’s Senior Credit Officer and co-author of the report. “The challenge comes more through cash outflows such as M&A, capital expenditures and pressure for shareholder returns.”
The past two years have been dominated by many of the big players looking to consolidate their positions through major external acquisitions, refocusing on core power and gas activities and — in the process — choosing to live with a lower rating.
The number of ratings in the single-A category continues to grow, with the number of Aaa/Aa rated players shrinking accordingly. In the absence of large future targets for the main players, Moody’s expects M&A to continue but at a lower level, i.e. with smaller “fill-in” acquisitions.
“Furthermore, we envisage a significant increase in organic capital expenditure as companies look to repower and diversify their fuel sources. Investment in renewables will feature high on CEOs’ and regulators’ agendas but is unlikely to lead to rating changes in the near to medium term,” said Andrew Madge, a Moody’s Senior Credit Officer and co-author of the report.
Government influence will also remain a key rating driver, according to the Moody’s report. The twin concerns of security of supply and climate change have become the pillars of EU energy policy and will shape future regulations in the EU and the European Economic Area. Additionally, in a drive to improve efficiency and competition, the European Commission has recently released proposals to separate transmission grids from vertically integrated companies, which also own competitive generation and supply activities. The aim is to improve investments in networks and facilitate fairer access.
Further extensive debates are expected on this topic, which has raised dissent in a number of quarters. “Moody’s will continue to monitor for ratings’ impact as discussion proceeds. If implemented, unbundling in some instances may have a negative impact on the ratings of certain vertically integrated entities over time,” added Francis.
