RPT-Fitch: Large European Utilities Have Limited Rating Headroom

Tue Mar 26, 2013 5:18am EDT

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March 26 (Reuters) - (The following statement was released by the rating agency) Many European utilities face downward rating pressure or at best have limited financial headroom at their current rating level. This reflects the sector's increased business risk and high financial leverage. The five largest European utilities rated by Fitch Ratings (ranked by funds from operations), EDF, Enel, E.ON, Iberdrola and RWE, have limited rating headroom and two of them, Enel and Iberdrola, have a Negative Outlook. Net debt of the five largest utilities is stubbornly high, at EUR166bn at end-2012, 2% up from EUR163bn at end-2011. The mid-term guidance published recently by large European utilities, together with their 2012 results, confirms Fitch's view that utilities' operating cash flows will be under pressure in 2013 and 2014. This is due to the prolonged economic contraction in much of Europe (we expect the eurozone's GDP to decline by 0.5% in 2013 after a 0.5% drop in 2012) leading to weakening demand and wholesale power prices, regulatory pressures and additional taxes for utilities in many European countries. An additional structural challenge for many utilities is lower cash flows from conventional power plants, mainly because of the rising share of subsidised renewable generation. Management reaction to sector and macroeconomic challenges has been prudent, ranging from capex cuts (although most companies have still large capex plans), to asset disposals, cost cutting and efficiency improvements. Most large companies aim to reduce their debt and improve credit metrics in 2013-2014. Dividend policies of the five largest utilities remain linked to payout ratios of between 50% and 60% of recurring income in most cases. Two companies, EDF and Iberdrola, have recently issued hybrid bonds (EUR6.2bn and EUR0.5bn, respectively), RWE issued hybrid bonds of EUR1.8bn in 2012, while Enel plans EUR5bn of hybrid bond issues in 2013-2015. Hybrid issuance is aimed at strengthening balance sheets. We believe that the solid liquidity and good access to debt markets that all these five companies have demonstrated are factors that mitigate some sector and macroeconomic challenges. For more details see our report "Large European Utilities Have Limited Rating Headroom", published today that covers the five largest European utilities rated by Fitch.

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