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Announcement:

Moody's: Energy policy affordability concerns expose some European utilities to political risk to detriment of credit quality

Global Credit Research - 21 Nov 2013

London, 21 November 2013 -- Concerns about the affordability of EU-set objectives for decarbonisation and renewable energy is exposing utility companies in some European countries to political risk to the detriment of their credit quality, says Moody's Investors Service in a Special Comment report on the industry published today.

Moody's report, entitled "European Utilities: Concerns About the Affordability of Energy Policy Increase Political Risk to the Detriment of Credit Quality", is available on www.moodys.com.

The ongoing programme to invest in renewable energy and meet EU targets continue to drive energy bills upwards for the majority of EU countries, while the growth in disposable income is expected to remain weak, increasing the pressure on domestic households. These conflicting drivers fuel the debate about the affordability of energy policy, particularly in countries with high expected price increases and an already high cost of energy and housing.

"We believe utility companies in these countries will be particularly exposed to political pressure to the detriment of their credit quality, with possible adverse measures include higher taxation of energy companies' profits, interference with market mechanisms and lower revenue for regulated networks," says Scott Phillips, a Vice President -- Senior Analyst in Moody's Infrastructure Finance Group and author of the report. "Given that most countries have yet to reach their individual targets, significantly higher levels of investment are required, and without any offsetting measures the strain on household budgets looks set to worsen. This in turn leads to an increase in political risk for the sector, with politicians more likely to adopt populist measures to ease this burden, at the expense of the credit quality of European utilities."

This scenario has already played out in Spain, where government-set tariffs applying to household customers have been insufficient to cover all system costs, including significant payments to renewable energy producers, for a number of years. This resulted in annual "tariff deficits" of the order of EUR4-5 billion over the past five years, which are ultimately being addressed principally at the utilities' expense.

Moody's analysis reveals the UK utilities, particularly SSE plc (A3 stable) and Centrica plc (A3 stable), to be most at risk of political interference: Energy costs, in conjunction with the other inelastic consumer expenditure items, are highest for UK households in comparison with those in France, Germany, Spain and Italy. While the proportion of total consumer expenditure that is made up of energy costs is still relatively low, the fact that these companies need to increase tariffs by more than inflation draws considerable attention to their business model and brings with it the risk of political interference.

Since 2008, political risk has been elevated for Italian utilities, which have been hit by windfall taxes, with a material credit-negative impact. However, while unit electricity prices are high in Italy, the burden of energy and housing costs is lower and reforms to reduce the cost of the energy system will limit future price rises. This reduces the risk of political interference for utilities such as Enel S.p.A.(Baa2 negative) and A2A (Baa3 negative) because of affordability concerns, although pressure remains because of the weak sovereign credit quality and macroeconomic situation. Moody's considers that there are elevated levels of risk in Germany and France as price rises will still be required to fund increasing amounts of renewables (Germany) and to reflect the economic cost of the system (France).

Subscribers can access this report via this link: https://www.moodys.com/research/European-Utilities-Concerns-About-the-Affordability-of-Energy-Policy-Increase--PBC_160463

NOTE TO JOURNALISTS ONLY: For more information, please call one of our global press information hotlines: London +44-20-7772-5456, New York +1-212-553-0376, Tokyo +813-5408-4110, Hong Kong +852-3758-1350, Sydney +61-2-9270-8141, Mexico City 001-888-779-5833, São Paulo 0800-891-2518, or Buenos Aires 0800-666-3506. You can also email us at mediarelations@moodys.com or visit our web site at www.moodys.com.

Scott Phillips
Vice President - Senior Analyst
Infrastructure Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Monica Merli
MD - Infrastructure Finance
Infrastructure Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's: Energy policy affordability concerns expose some European utilities to political risk to detriment of credit quality
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