Fitch Ratings says in a report that the outlook for central European (CE) electric utilities is stable for 2010. The agency believes that large utilities with a solid market position will remain fundamentally strong despite the negative effect of the economic downturn, which has mainly meant reduced demand for electricity and lower wholesale prices.

"Large CE players, often with implicit state support, enjoy good access to debt markets, which is important in light of their substantial mid- to long-term capex plans, which are likely to be co-funded by debt," said Arkadiusz Wicik, Director in Fitch's European Energy, Utilities and Regulation team. "The access to external funding for smaller projects or lower-rated companies is clearly weaker given the continued constraints on the credit markets."

The agency expects funds from operations (FFO) to remain relatively healthy for integrated utilities in 2010, reflecting these companies' higher resilience to the economic downturn than would be the case with more cyclical businesses. However, FFO in power generation is likely to be weaker than in 2009, which was a strong year for cash flow given that utilities sold power for 2009 on a forward basis in 2008 at record high average prices. This helped utilities to report solid FFO in generation, despite a deep fall in power consumption which declined 7% in the Czech Republic and 5.5% in Poland in the first nine months of 2009 (9M09) yoy. The negative impact of the fall in wholesale prices in 2009 will be seen in 2010 results, due to the companies' forward hedging of power contracts one-to-two years ahead.

The agency projects an erosion of credit ratios of the three rated CE companies by 2012: Czech Republic-based CEZ, a.s. (CEZ, 'A-'/Stable), Poland's PGE Polska Grupa Energetyczna S.A. (PGE, 'BBB+'/Stable), and Slovakia-based Slovenske Elektrarne, a.s. (SE, 'BBB'/Stable). However, their current (December 2009) low leverage provides sufficient room to increase leverage to projected net debt to EBITDA of 2x-2.5x, levels slightly below the average for western European utilities, while maintaining their current ratings. Fitch's projected ratios are within the limits for the companies' current ratings and, as a result, should not lead to changes in ratings or outlooks. A deterioration in credit ratios is likely to be gradual in 2010-2012, which gives management some room to manoeuvre to adjust capex plans in the case of weaker-than-expected FFO.

According to Fitch's projections, about 60% of the 2009-2012 capex of the three rated CE utilities will be funded from cash flow from operations after dividends, and the remaining 40% from a mix of bank loans and corporate bonds. In the case of PGE, the funding mix includes cash proceeds from the recent equity increase (15% of the capex plan), which reduced the need for debt-funding to about 25% of the 2009-2012 capex plan.