TotalEnergies' oil refinery in Germany is supplied by a pipeline from Russia. The company aims to cut off Russian crude imports in response to the invasion of Ukraine.
Source: Sean Gallup/Getty Images News via Getty Images
Europe's utility sector could suffer from dampened credit profiles if Russia's invasion of Ukraine forces some countries to ration energy supplies, analysts at Moody's said.
While the credit rating agency does not expect Europe to completely halt imports of Russian energy, a potential scenario involving a four- to six-month supply cut would still "likely trigger an economic recession" in Europe, according to the April 13 report. Should some countries turn to rations to alleviate challenges to replacing Russian supplies, Moody's continued, their utilities "would also be among the most exposed" sectors to credit-negative impacts.
"Whereas most utilities have limited direct exposure to Russian gas in terms of gas procurement, indirect exposures may be substantially higher and difficult to measure as gas procurement counterparties may rely upon Russian gas to fulfill their contractual obligations," Moody's wrote. "While utilities with a high degree of nonthermal merchant generation will benefit from higher electricity prices, this is likely to be at least partially mitigated by likely increased intervention from authorities to cushion the impact of higher prices on households."
Some EU members such as Lithuania and Poland have already committed to stop importing Russian gas, the rating agency said.
As an alternative, the U.S. plans to ramp up LNG supplies to the EU as part of the bloc's plan to slash its demand for Russian gas by two-thirds by year-end and eliminate Russian energy imports by 2027. Some analysts, however, think the European Commission's assumptions about LNG are unrealistic given international competition for the fuel, despite the commission's promise to work with EU member states to accelerate regulatory approvals for new LNG import infrastructure.
Finland's Fortum Oyj and subsidiary Uniper SE are among the European utilities most exposed to Russia. About 20% of Fortum's EBITDA is generated from assets in the country, according to Fitch Ratings. Both Fortum and Uniper share prices have plummeted since the invasion of Ukraine, and S&P Global Ratings placed Fortum and Uniper on a watch for downgrade March 14.
Ratings analysts agreed that European utilities face additional credit headwinds given the geopolitical tensions and their implication for energy market volatility, particularly when it comes to hedging.
"We recognize that the gas procurement market and gas supply contracts remain generally opaque, with little public information available on the terms and conditions, including the price formulas," Ratings told clients March 17.
European utilities' credit quality is benefiting from an improved outlook for certain oil, gas and coal suppliers by "renegotiating contracts, limiting margin calls with key counterparties, using letters of credit to manage related cash risk with key core banks and securing additional credit lines to manage liquidity," Ratings said.
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