The drop in first quarter electricity and gas volumes (-7.9% and -19% respectively compared with Q108) caused by the contraction in consumption, especially from industrial customers, coupled with a lower oil price environment has markedly impacted the profitability of Italian gas suppliers and un-hedged electricity generators. In such an environment, only generators with a balanced portfolio across technologies and with comprehensive forward selling strategies are relatively well protected against margin pressure. Enel Spa ('A-'/Rating Watch Negative) for example posted a 14% EBITDA increase for Q109 compared with Q108 due to its contracted capacity despite a slight reduction in revenues due to decreased demand. Enel's Rating Watch Negative reflects execution risks linked to a de-leveraging strategy tied to asset disposals and a capital increase.
Greater exposure to oil price volatility has affected Edison Spa's ('BBB+'/Stable) business profile. Edison's Outlook was revised to Stable from Positive in December 2008 following the debt-funded acquisition of upstream gas assets. Eni Spa ('AA-'/Stable) Q109 results were affected by the decline in oil prices and lower gas sale volumes, which contributed to a 36% drop in adjusting operating profits compared with Q108. Eni's rating is nonetheless supported by its strong integrated business profile along the whole oil and gas value chain and a robust capital structure.
Integrated and regulated Italian utilities have shown a greater resilience to the recession. However, volume risk remains, especially for distribution companies like Acea Spa ('A+'/Negative). Volume risk is less relevant for electricity transmission companies such as Terna Spa ('A'/Stable), as a recently introduced provision in the revenue-setting mechanism for transmission by the regulator established a revenue floor to protect margins in case of a significant drop in transported electricity.
Electricity prices in the first four months of the year dropped by 11% and by 17% on the same period last year, and the price decrease has continued so far in May. This does not affect forward contracts for deliveries in 2009, but the impact will be visible on 2010 profitability margins.
"The severity of the economic recession experienced in the first quarter of the year has extended beyond expectations. Signs of a recovery in the short-term remain weak and, at this stage, it is difficult to anticipate the turning point in the cycle. Italian generators are now hedging their capacity for next year and present market fundamentals suggest that companies' profitability in 2010 could be significantly impacted," says Francesca Fraulo, Director in Fitch's Energy, Utilities and Regulation team for the EMEA region.
In Q109, energy and utility companies' cash flows were also negatively impacted by higher tax charges linked to the provision introduced in the 2009 budget law. The tax charge, known as the "Robin Hood Tax", increased the corporate income tax rate by 5.5% from 2008 to 33%. A recent proposal suggests the tax might be increased by a further 1% to 34% from 2009.
"The tax was introduced to help fund social subsidies to low income households after energy companies had benefited from peaking oil prices between 2007 and 2008. However, the oil price trend inverted just a few weeks after the introduction of the measure and since then the tax charges have absorbed substantial cash flow that otherwise would have been devoted to funding companies' capex budgets," Ms Fraulo adds.
As confirmed by a number of revised business plans, or lower capex spending in Q109 against original budgets, some utility companies have responded to decreasing oil prices and increased market uncertainty by scaling back, delaying or suspending investments. This could limit their growth when the markets and energy demand recover, but cost savings and efficiency programmes, especially targeted at controlling working capital dynamics, have gained priority on management agendas.
The scaling back of investment plans has, in some instances, been driven by a need to decrease leverage. This was the rationale given by Enel for its 10% cut in capex. In other cases, companies have reduced capex spending as they wait to see how the economic climate develops and as they have sought to renegotiate supply contracts with this environment.
