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Germany’s municipal utilities face challenging financial outlook: shareholder support will be vital

Germany’s municipal utilities face heavy market turmoil and transition of their business models in 2022/2023 resulting in an increasing dependence on their municipal shareholders. A massive slump and shifting patterns in consumption, headwinds from price increases, intensified competition, changed regulatory frameworks and limited room for cost savings will crimp profitability.

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“The biggest municipal utilities face significant future capex if they are to accelerate smart urban development and the transition to more sustainable energy and public regional transport. Europe’s leading utilities are benefiting from diversified access to capital and energy markets across the value chain, innovative customer-specific platforms and advanced renewable energy expansion. High investments, lower state support and the worsening access to European energy exchanges and OTC trading business due to significantly elevated collateral deposits will drive further consolidation in the sector,” says Karl Holger Möller, analyst at Scope Hamburg.

“Extreme energy price peaks, lower demand, less state support and substantial transition costs will further erode credit metrics and negatively affect financial flexibility. This puts pressure on municipal utilities to arrange future sustainability-linked funding,” he says.
Scope Hamburg has assessed the principal credit metrics of the 50 major German municipal utilities with a turnover of at least EUR 300m (median 2021 of EUR 800m) for the period 2019-2021 to analyse the most important trends. Three quarters of the utilities benefit from high cross-municipal and horizontal diversification. Operating cashflow generation from regulated activities is largely predictable as it is recurring.

Municipal utilities face high combined capex amounting to EUR 8-10bn a year. The most important capex items will include the expansion of CO2-free wind, solar, bio-methane and hydrogen power generation, and investment in storage and distribution infrastructure. The utilities will have to invest further for the transition towards autonomous regional public transport, refurbishment of social housing, and the development of smart cities.

Unhedged energy sales and reduced demand will leave their mark, squeezing utilities’ profitability and swallowing up liquidity buffers through 2024. Federal government, states and municipal shareholders are temporarily increasing financial support to prevent the recession from constraining public-supply mandates and slowing the transitions to more sustainable energy and transport services.

The most important credit metrics of German municipal utilities deteriorated between 2019-2021. The utilities’ median Scope-adjusted EBITDA-margin fell to 7.8% in 2021 from 10.1% in 2019. The median leverage rose to 5.2x from 3.7x over the same period. Operating net cashflow/net capex coverage worsened to 0.6x in 2021 from 0.8x in 2019 indicating that high capex needs were met only through additional external (municipal) funding. Credit metrics have deteriorated further in 2022 and we expect this worsening to continue in the medium-term.