We continue to believe that the EMEA utilities sector is relatively resilient to the economic shock from COVID-19 and low oil prices, as we highlighted in our report “EMEA Utilities Should Withstand COVID-19 Better Than Most Sectors,” published on March 24, 2020. Below, we provide a summary of the recent rating actions and links to reports we have published on the sector since early March.

Our recent CreditWatch placements and outlook revisions to negative primarily reflect issuers' larger exposure to merchant power activities (power generation and supply) or other more cyclical activities (energy services), combined with no or tight headroom under their credit metrics at year-end 2019. This includes outlook revisions on Engie, Fortum, Uniper, and CEZ (see table 1). We believe these activities will be negatively affected in 2020 through lower volumes sold due to weaker demand, and in 2021 through lower realized prices as power prices remain subdued for next year. The negative rating bias also reflects the need for material remediation measures to cope with these earnings' downside risks, either through drastic cuts in operating costs, investments, or dividends; or though significant asset disposals, which may become more challenging to complete in the current environment. Because the extent of the earnings' downside remains unknown and the ability and willingness to successfully complete such remediation measures are uncertain, we see mounting downside pressure on the ratings on these companies. On top of this, Croatia-based Zagrebacki Holding has also been affected by the recent earthquake in Zagreb.

Since we published our report “EMEA Utilities Should Withstand COVID-19 Better Than Most Sectors,” last week, some utilities have announced dividend cuts (see table 2) and confirmed that investments will be lower than initially planned (notably EDF, Snam, EON, and Engie). We consider these positive credit developments. Some utilities have announced delayed bill collections, which will negatively affect working capital. These may be enforced by governments (as in France or Russia) or by companies themselves (as in the case of Naturgy in Spain).

At this stage, we continue to consider likely working capital increases as manageable for utilities given the concentration on the most vulnerable customers and the utilities' adequate liquidity levels. What's more, we consider these increases only temporary. Yet, if the outcomes of the COVID-19 pandemic deepen, we may see increasing corporate default rates, and some of these delayed bills could turn into bad debt. While it is currently too early to assess, we continue to believe that this risk will be one of the key challenges for utilities over the coming quarters.

On a more positive note, utilities have a demonstrated their ability to access capital markets even amid the currently volatile situation, owing to their generally more resilient business risk profiles and solid investment-grade ratings (see table 3). While financing conditions are not as favorable as at the beginning of the year, the coupons of these recent bonds are still contributing to lowering their average cost of debt.

We consider the main risks for utilities will stem from prolonged lockdown measures, which could notably imply more downward pressure on sovereign ratings. (see our "Calendar Of 2020 EMEA Sovereign, Regional, And Local Government Rating Publication Dates," published on Dec. 20, 2019).

S&P Global Ratings acknowledges a high degree of uncertainty about the rate of spread and peak of the coronavirus outbreak. Some government authorities estimate the pandemic will peak about midyear, and we are using this assumption in assessing the economic and credit implications. We believe the measures adopted to contain COVID-19 have pushed the global economy into recession (see our macroeconomic and credit updates here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.

Table 1

Chart 1

Chart 2

Table 2

Table 3

Table 4

Rating Action Research Since March 1

CreditWatch placements

• ENGIE Rating Placed On CreditWatch Negative Amid COVID-19 Outbreak Due To Tight Financial Headroom And Governance Change, March 25, 2020
• Croatia-Based Zagrebacki Holding 'B+' Rating On Watch Negative On Tightening Liquidity, April 1, 2020

Negative outlooks

• CEZ a.s. Outlook Revised To Negative On Tight Financial Headroom Amid Market Turmoil; Ratings Affirmed, March 31, 2020
• Fortum Oyj 'BBB' Rating Affirmed On Russian Regulatory Approval; Outlook Negative As Material Uncertainties Remain, March 19, 2020
• Uniper SE 'BBB' Rating Affirmed On Russian Regulatory Approval; Outlook Negative, March 20, 2020
• Maltese Utility Enemalta Outlook To Negative On Financial Hit From Loss Of Submarine Power Cable; 'BB-' Rating Affirmed, March 16, 2020
• KazTransGas And KazTransOil Outlooks Revised To Negative After Similar Action On Parent; Affirmed At 'BB', March 31, 2020

Rating affirmations

• French Utility Veolia Environnement S.A. Affirmed At 'BBB' Despite COVID-19 Operating Uncertainty; Outlook Stable, March 27, 2020
• Centrica Ratings Affirmed Amid Challenging Market Conditions On Management Commitment To Credit Metrics; Outlook Stable, March 31, 2020
• German Utility E. ON SE 'BBB/A-2' Ratings Affirmed Following Asset Swap Progress; Outlook Remains Stable, March 26, 2020
• Red Electrica Corporacion S.A. 'A-/A-2' Ratings Affirmed On Regulatory Clarity; Outlook Stable, March 6, 2020

Rating upgrade

• Eneco Beheer Upgraded To 'A-' On Potential Support From New Majority Shareholder Mitsubishi Corp; Outlook Stable, March 31, 2020

Other rating analysis updates

• Electricite de France, S.A., April 3, 2020
• Energy Group Enel's 2019 Results Are In Line With Expectations; 2020-2022 Guidance Currently Unaffected By COVID-19, March 23, 2020
• Enagas S.A., March 24, 2020
• Italian Gas Transmission Company SNAM's 2019 Results Are In Line With Expectations; COVID-19 Impact Should Be Limited, March 20, 2020
• Enexis Holding N.V., March 6, 2020
• Terna's 2019 Results And Ambitious 2020-2024 Strategic Plan Won't Harm Its Credit Quality, March 11, 2020
• Tekniska verken i Linkoping AB, March 12, 2020