Utility Week

20 | 24TH - 30TH JANUARY 2020 | UTILITY WEEK Finance & Investment W hile the nation has been digest- ing the General Election result on 12 December – and its Brexit conse- quences – the decisive majority won by the Conservative Party has undoubtedly been good news for the utilities sector. Not surprisingly, with much of the uncer- tainty removed, share prices have responded positively. Aƒer all, the very real threat of renation- alisation had hung, like the Sword of Damo- cles, over much of the quoted utilities sector. Several utilities had even taken action to transfer some of their assets offshore to make it that much harder for an incoming Labour government to acquire them. Of course, the Labour Party would have needed a big majority to implement its wide- ranging renationalisation programme. The fact that the Conservative Party secured an 80-seat majority means renationalisation has been kicked into the very long grass – at least for the utilities sector, if not for the hap- less rail sector. Undoubtedly, many utility executives had been genuinely concerned about the utility policies of an incoming Labour government. Aƒer all, its predecessors had fought many renationalisation battles in the past, back to the bitter shipbuilding disputes of the 1970s. More recently, RBS was nationalised by the previous Labour government – not on ideological grounds, simply on the basis that RBS was heading to the bankruptcy courts. Eventually, it received over £45 billion of tax- payers' money to keep it afloat. The most relevant precedent was Rail- track, which crashed almost 20 years ago. Many utility investors were aware that the Labour government of the time had given – aƒer very considerable pressure – a mod- est 260p per share as compensation. At their peak, Railtrack shares had been worth over £17. Against that background, it was hardly surprising that utility shares were weak before 12 December, especially those that were on the Labour Party's hit list. These included National Grid, the electricity distri- bution companies and the privatised water companies. Interestingly, BT's key Openreach divi- sion was added to the renationalisation list, almost as an aƒerthought. In effect, Open- reach is the guardian of much of the UK's internet connections. Although it has escaped renationalisa- tion – and apparently free charging, another Labour Party manifesto commitment – Openreach still has a massive investment programme. And, despite numerous Ofcom proposals of late, it is still not clear how the planned nationwide rollout of a full fibre broadband network will actually be under- taken – and financed. Price reviews move forward Not only has the fog liƒed on utility rena- tionalisation, several price reviews have also moved forward. For the water companies, PR19 remains pivotal, especially because Ofwat's tough talking now appears to have been backed up in the final determinations that were issued shortly aƒer the general election. Despite the various conditional cost allowances benefiting Thames, the three quoted water companies – all of whom were Ofwat fast-trackers – saw no major changes. None of this trio – Severn Trent, United Utili- ties and South West, the latter is part of the Pennon Group – is likely to appeal. All three are set to announce new dividend policies now their financial outlook is far clearer. Indeed, both Severn Trent and United Utilities have convened capital market days to explain to analysts and investors how they plan to operate during the next five years – no Competition and Markets Authority (CMA) appeals there presumably. Pennon is believed to have appointed bankers to undertake the sale of its Viridor waste business, which could also be a candi- date for an IPO. However, the £4 billion price mooted in the press for this business seems distinctly racy, with a figure nearer £3 billion being more feasible. Having waited for South West's final determination, Pennon will be re-examining its finances – and will seek to reward its shareholders accordingly. For other water companies, the grass is far less green. Some, especially those with high debts, may end up appealing to the CMA. In some cases, the gap between what these water companies are prepared to offer and what Ofwat is seeking is wide. We can see clearly now The fog of uncertainty that has clouded the political landscape in the UK for years has cleared somewhat in the wake of the general election. Nigel Hawkins describes the view for utilities. It has been over 22 years since a Tory administration had a substantial parliamentary majority Analysis

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