Amidst the Covid-19 pandemic, power utilities are struggling to keep their operations steady. Many of them have had to reduce significant portion of their workforce and keep only essential operations running.
The market has been witnessing reduced electricity demand. This led the utilities to make several announcements and take several steps. In April 2020, Eskom Holding SOC, a South African power retailer announced that it would purchase less electricity from independent wind parks in the coming weeks as it has currently more capacity than required to fulfil the revised demand. Some utilities have revised their 2020 targets and estimates for generation, revenue, profits, and other metrics. In March 2020, EDF announced that they have revised their nuclear electricity production in France for 2020 due to the COVID-19 pandemic, and that the profit estimates would be revised too. In April, Engie SA announced that they have withdrawn 2020 guidance and scrapped dividend payment against 2019 earnings.
Added to the difficult times, credit rating agencies have degraded the ratings of several power utilities. For instance, In March 2020, S&P Global Ratings issued new rating on Talen Energy Supply LLC lowing it from B+ to B citing weakened credit measures. Similarly, in April 2020, Fitch Ratings downgraded the rating for Eskom Holdings SOC Ltd.’s senior unsecured debt to ‘B+’/’RR4’ from ‘BB-‘ and the senior unsecured guaranteed debt to ‘BB’ from ‘BB+’ citing one of the reasons as negative impact of COVID-19 on operations of the company.
Revised credit ratings would further affect these utilities’ ability to raise debt to fight the very situation that led to the revised rating, setting off what can be seen as a vicious cycle. Despite this, utilities have tried various financial instruments to raise liquidity to fund their operational and capital expenditure. Some have opted for term loans to maintain their liquidity level. For instance, in March 2020, Duke Energy Corporation announced that they have borrowed a $1.5 billion, 364-day term loan. The loan is a short term borrowing aimed at helping with some immediate expenses and not to support long term capital expenditure. For longer term expenditure the company may have other plans for raising capital. In February, Duke had announced an increase in their CAPEX for the period 2020-2024 from $50bn to $56bn.
To sustain estimated capital expenses several utilities have opted for debt based financial instruments – specifically bonds. Companies are opting for bonds as these debt based financial instruments are more lucrative to investors and will be more successful in terms of subscription. Bonds are safer investments for investors as they have less volatility compared to stocks and sometimes offer higher interest payments compared to dividends. In March 2020, Engie SA issued bonds worth EUR2.5bn in three tranches with an average coupon rate of 1.71% with an average maturity of 8 years. These long term bonds along with the scrapping of 2019 dividend payments led to the company improving its financial position to over EUR16bn liquidity which the company plans to use for infrastructure building and shielding the effect of the pandemic on its planned capital expenditure. In April, EnBW Energie Baden-Württemberg AG issued corporate bonds worth EUR500m with a maturity of 5 years and coupon rate of 0.625%. These medium term bonds were aimed at keeping attractive terms with stakeholders and boost investor confidence and support by maintaining liquidity in the current volatile environment. The utility may use the liquidity to continue its planned capital expenditure for 2020 unhindered.
Some utilities are also selling off their assets, mostly non-core assets to generate liquidity and reduce operational expenditure. In mid-April, Xcel Energy sold its 720 MW gas plant for $680m and stated that a part of the proceeds would go into a fund meant to support the recovery from the COVID19 pandemic. In March, State Grid Corporation of China announced to sell off its manufacturing and property operations to maintain the power grid as its primary business. The timing of this decision hints at least in part at the company’s intention to increase liquidity and focus on core business as a result of the uncertainty caused by the pandemic.
Besides maintaining liquidity for the uncertain times, some utilities are planning to use the funds raised to invest in capital equipment which will subsequently help the suppliers stay afloat during this pandemic. In March 2020, Iberdrola announced their plan to invest $10.85bn in 2020 and place equipment orders of EUR2.9bn to its suppliers. It is important for utilities to help suppliers wade this storm so that they survive and continue the supply of equipment and avoid a possible shortage in the near future.