Vattenfall AB

The stable outlook reflects our assumption that Vattenfall will manage earning pressure stemming from lower power prices and increasing investment such that it will maintain a financial risk profile in line with our expectations for the rating, namely FFO to debt above 20%. The group's significant share of stable cash flows from electricity distribution and district heating support the rating. The company's proven flexibility in making dividend payouts might somewhat mitigate any operating underperformance. We could lower the rating if we believe that Vattenfall's position in the power generation business was weakening; for example, if power prices remains subdued or if the wind portfolio's planned expansion is delayed or unsuccessful. These factors could have negative financial consequences for the company

...Very low power prices will lead to lower earnings from power generation. S&P Global Ratings therefore expects EBITDA contribution from Vattenfall AB's power generation business will decline to about Swedish krona (SEK) 16 billion-SEK18 billion in 2021 from SEK19 billion in 2019. We expect the effect to become more visible in 2021, because the company's has hedges that mitigate most price effects in 2020--65% of production is hedged at 33 per megawatt-hour (MWh). In addition, there is a large price difference between various areas in Sweden, owing to limitations in the electricity grid. The combination has given good support to Vattenfall's achieved prices which was 31 per MW for the first nine months of 2020, comparable with that of the same period in 2019 and well above the average spot price of about 9.50 per MW. In 2021 and 2022, the hedge ratio are 63% and 36% of output, respectively, and we therefore expect achieved prices and earnings to weaken in 2021 and 2022. Lower power prices...

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