Global Arab Network | Electric & Gas Utilities to experience increasing negative pressure in Europe, Middle East and Africa

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Electric & Gas Utilities to experience increasing negative pressure in Europe, Middle East and Africa

Friday, 19 November 2010 11:20

UAE (Dubai) - A combination of subdued fundamentals, rising investment and political risk and limited financial flexibility is likely to exert increasing pressure on Europe, the Middle East and Africa utilities' credit quality, says Moody's Investors Service in an Industry Outlook published today, exploring the fundamental credit conditions in the industry over the next 12-18 months, reports Global Arab Network according to a press statement

The outlook for unregulated EMEA electric and gas utilities is negative, while the outlook for regulated utilities remains stable.

"Unregulated utilities' earnings visibility is clouded by modest demand recovery, weak power prices and an enduring gas/oil spread, and rising investment and political risk is in certain markets crystallising as a material drag on operating cash flows," explains Niel Bisset, a Moody's Senior Vice President, and author of the report. Additionally, subdued earnings prospects and relatively high leverage imply reducing flexibility at current rating levels.

Since the onset of the crisis, Moody's notes that issuers within this sector have coped relatively well with the lower demand and declining power prices that have been characteristic of the recession. Utilities' focus is expected to remain on defending ratings, by sustaining earnings and strengthening balance sheets through a continuation of measures taken to date, including cost cutting, capex moderation and asset disposals.

But room for manoeuvre is narrowing, so targeted rating levels may in some cases be re-assessed in current benign debt markets, and given shareholder pressure to improve performance.

Given the uncertain macroeconomic outlook, investors' appetite to subscribe to fresh equity appears diminished, although access to credit markets remains sound, reflected by recent sizeable hybrid issuance.

"Looking to the longer-term, having focused in the last couple of years on defensive tactics to deal with the downturn, there are signs that utility-group strategies may be undergoing a more profound reappraisal, a part of which will include consideration of asset mix, geographical diversification and financial strategy. All other variables being equal, if business risk increases due to strategy changes, a tightening of guideline leverage ratios at the same rating level will likely follow," adds Mr. Bisset.

Moody's report, entitled "Industry Outlook: EMEA Electric & Gas Utilities: Investment and political risks generate additional headwinds", is available on moodys website.

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