Utility Week

UTILITY WEEK | 25TH - 31ST JANUARY 2019 | 17 Finance & Investment to be announced in December. Importantly, most water companies seem reconciled to a Wacc assumption of c2.4 per cent, which would constitute a cut of a third on PR14. Severn Trent will be hoping that it becomes one of Ofwat's "exceptional" or – failing that "fast tracker" – companies; both designations confer some financial rewards, a lighter regulatory touch and kudos among industry peers. It has performed well across several spheres but whether this is sufficient to merit either the much-coveted "excep- tional" or "fast tracker" status remains to be seen. In any event, both Severn Trent and United Utilities have low dividend cover so that dividend cuts from 2020/21 are quite likely. In the latter's case, its leakage record remains poor and it is an unlikely candidate even for "fast-tracking". Pennon's prospects are slightly differ- ent. Its core water and sewerage business remains solid and has improved noticeably over the years. However, its waste opera- tions, via Viridor, offer some upside but the waste market – and especially prices – remain volatile. While the fortunes of Wessex are repre- sented – to a limited extent – through the share price rating of its Malaysian owners, YTL Infrastructure, some of its shareholders are reputedly unhappy about Ofwat's much lower Wacc assumption for PR19. Undoubtedly, the outlook for dividend growth will remain a prime driver of utility share prices, but 2019 could see some corpo- rate activity, especially as utility share prices are low: sterling, too, is weak. Of course, much depends on the Brexit scenario. But the electricity sector has seen some recent corporate action, including Shell's acquisition of First Utility. It could become a far more potent force in the UK energy supply if it chose – as could BP. SSE's energy supply business is "up for grabs", as arguably is that of RWE. And Cen- trica itself has really been struggling and may well become the object of bid speculation. Water company consolidation is certainly possible, especially aer PR19 is "done and dusted". Aer all, Severn Trent recently made a "tuck-in" acquisition of Dee Valley; similar deals may follow. In any event, 2019 seems likely to be a very lively year for the UK utilities sector. The heady brew of political turmoil, pivotal regu- latory rulings, rising interest rates and an unstable global economy will certainly keep utility investors, sector analysts and journal- ists on their toes. Nigel Hawkins, utility analyst, Hardman & Co Centrica share price, one year Pennon share price, one year Severn Trent share price, one year National Grid share price, one year SSE share price, one year United Utilities share price, one year 170 160 150 140 130 120 870 860 850 840 830 820 810 90 80 70 60 50 40 Opec basket WTI Brent dated Sep 17 Oct 17 Nov 17 Dec 17 Jan 18 Feb 18 Mar 18 Apr 18 May 18 Jun 18 Jul 18 Aug 18 Sep 18 Oct 18 USD per barrel Apr 18 Aug 18 Dec 19 17 Dec 18 28 Dec 18 Apr 18 Aug 18 Dec 19 Apr 18 Aug 18 Dec 19 Apr 18 Aug 18 Dec 19 Apr 18 Aug 18 Dec 19 Apr 18 Aug 18 Dec 19 900 850 800 750 700 900 800 700 600 500 1500 1400 1300 1200 1100 1000 2100 2000 1900 1800 1700 850 800 750 700 650 OIL PRICE, ONE YEAR NATIONAL GRID SHARE PRICE, 17-28 DECEMBER 2018 Source: Argus Media, Opec, and Platts

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