Moody's cuts Czech utility ČEZ's rating for second time in 12 months

Czech energy company ČEZ has had its rating cut by international credit rating agency Moody’s for the second time in twelve months. While it was downgraded from A2 to A3 in June last year, yesterday it was cut to Baa1. The agency primarily cites the low exchange price of electricity and the structure of the company’s generating assets.

The main reason is electricity prices on the exchange, which have fallen significantly over the past several months and have the greatest impact on the company’s revenues. Similar reasoning from the agency was also the main reason for last June’s rating downgrade to A3. While last year forward prices fell to levels of EUR 30-35/MWh, electricity prices for the following calendar year are currently around EUR 22/MWh.

The rating outlook, as with the downgrade in June last year, is stable. The agency highlights the strong link between electricity prices and ČEZ’s performance, particularly due to the structure of its generation portfolio. Most electricity production comes from coal-fired, nuclear and hydroelectric power plants, which are less able to adapt to current electricity prices.

On the other hand, the agency highlights the generally low electricity generation costs of the asset portfolio, which should allow it to generate sufficient cash flow even at the current low electricity prices. Another advantage is the completion of an extensive investment programme to increase the capacity of existing power plants.

The agency further states that the metrics determining the rating may deteriorate over the next two to three years. The reason is the announcement of further investments worth CZK 50-60bn and an increase in the target net debt-to-EBITDA ratio. The company plans to invest primarily in renewable sources, decentralised energy, distribution and district heating.

In addition to large, financially demanding acquisitions, the planned construction of new nuclear reactors could also pose a risk to the current rating, Moody’s added.

The review of ČEZ’s rating was initiated in the first half of February, when Moody’s also launched rating reviews for power companies including Vattenfall, EDF, E.ON and RWE. During the same period, the ratings of Iberdrola and EnBW were affirmed.