* Some light at the end of EU utilities tunnel
* Most firms on negative outlook, but transformation underway
* Pioneers in renewables, grids get better credit ratings
By Geert De Clercq
PARIS, June 15 (Reuters) - European utilities’ credit rating outlook could brighten from 2018 as companies restructure and regulation softens, but the next two years will remain difficult, ratings agency S&P said.
Standard and Poor’s has issued more downgrades than upgrades for seven years as utilities struggle with overcapacity caused by a flood of renewable energy.
In 2015, a wave of downgrades pushed utilities’ debt to mid-BBB level, two notches above non-investment grade and S&P keeps most big firms on negative outlook.
But the industry has started a major transformation, moving away from unregulated merchant generation and into regulated networks, renewables and energy efficiency services.
S&P EMEA utilities chief Pierre Georges said the fruits of that transformation will not be available before 2018 and there is no guarantee this strategy will be executed successfully.
“The negative outlook on most EU utilities reflects the high execution risk,” Georges told Reuters at an S&P seminar.
A softening of the tough regulatory environment of the past years would also help, as governments begin to realise how low stock prices and weak credit profiles of this strategic industry pose a risk for the wider economy.
“In Germany, where the Energiewende has been very harsh on utilities, the tone in discussions with authorities has changed compared to two years ago,” Georges said, referring to Berlin’s shift from fossil fuels toward renewable sources of power.
He said France too had moved to a more supportive stance, with plans for a carbon tax that would boost power prices, and financial support for EDF.
Georges said utilities who were first to overhaul strategies have already seen their outlook brighten.
Spain’s Iberdrola, a pioneer in renewables and grids, was upgraded to BBB+ in April, S&P’s only upgrade in the sector this year. Italy’s Enel,, another forerunner in green power, is rated BBB with stable outlook while the rest of the sector has a negative outlook.
“Enel’s transformation is taking more time and they may have some more M&A appetite, therefore the credit metrics did not crystallise into an upward trend,” Georges said.
French Engie, which was downgraded to A- with negative outlook in April, is rated higher than sector peers as it leads the way in networks, renewables, energy services and international deployment.
Georges said Engie is the most international utility, with significant geographical diversification of its cash flows.
As for Germany’s RWE, which this week was downgraded to BBB-, one notch above junk, with negative outlook, Georges said management has a turnaround strategy.
“They have plan, the question is about execution,” he said. (Editing by Alexandra Hudson)