Stable outlook for EMEA electric and gas utilities

The outlook for EMEA electric and gas utilities is stable, as sector-wide rating changes are unlikely, even though operating conditions remain tough and will require many companies to continue to moderate expenditure to adjust to still low demand, Moody's Investors Service said in a new report.
"Despite the ongoing difficult operating conditions for many companies, a number of factors and measures taken by the companies have limited the impact on utilities' credit strength," said Helen Francis, a Vice President-Senior Credit Officer in Moody's Global Infrastructure Finance Group. "Moody's expects that companies will continue to deploy similar tactics over the next 12 months to minimise the impact of a still challenging and uncertain environment."
Indeed, although the profitability of EMEA utilities has been hit by the most severe drop in demand observed in decades and lower prices, Moody's noted that this has been somewhat mitigated by forward sales of power at fixed prices/volumes and diversified earnings. Furthermore, many companies with unregulated activities have cut operating costs to decrease the pressure on profitability and reduced capex to gain
flexibility, with the aim of preserving their financial profiles and reducing the risk of downgrades.
Moody's also recognises that certain utilities have issued fresh capital, virtually eliminated share buybacks and implemented more cautious dividend policies. A number have pursued asset disposals with the aim of defending ratings. Furthermore, the utilities' ability to access credit markets to fund sizeable capex and refinancing needs has ensured solid liquidity in most cases. Large-scale M&A activity has also slowed down, although strategic opportunities continue to attract interest. The rating agency points out that there could be negative pressure on certain issuers who are weakly positioned in their rating category, as their financial recovery could be hampered by the unfavourable market conditions, which limit growth prospects, and higher execution risk.
"Moody's is also cautious about the industry's medium-term prospects because of the considerable investment needs in both the regulated and unregulated sectors," explained Niel Bisset, a Senior Vice President in Moody's Global Infrastructure Group.
In the longer term, Moody's believes the sector faces considerable challenges, including meeting long-term capex requirements, uncertainty over commodity price evolution, and regulatory and political challenges. Thus, utilities may need to consider additional measures to maintain their ratings.