Utility Week

UTILITY WEEK | 20TH - 26TH MARCH 2020 | 17 Finance & Investment Finance & Investment are depressing – and perplexing – numbers. As its now outgoing chief executive Iain Conn hands over the reins, new interim CEO and former group chief financial officer Chris O'Shea, faces a formidable challenge. SSE, too, saw its shares fall back by around 10 per cent in the past week alone. To be sure, its rating had recently recovered sharply on the back of enhanced renewable generation valuations, the disposal of its retail supply business, the general election result and a more credible dividend policy. Renewables and bankruptcies Two further implications of plunging oil and gas prices merit comment. First, assuming that gas prices stay low for an extended period, there may be conse- quences for the renewable generation sector. If gas generation kicks in more aggressively, renewable generation plant may become less competitive, especially in terms of subsidy- free plants, a few of which have been built. Furthermore, non-subsidy revenues may decline on the back of lower selling prices. Second, in the supply market, there has been a procession of bankruptcies in recent months as new entrants fail to secure a reasonable market share at the right price. Coping with such price volatility is a major challenge for small utility suppliers, and fur- ther casualties seem inevitable. Arguably, true utility status is established if a stock does not follow a pronounced change in market sentiment, as has been the case recently. National Grid, currently capitalised at around £34 billion, is an obvious example. Inevitably, its share price jumped aŠer the December general election result, although it still faces a pivotal review of its UK electricity and gas transmission businesses, which will first have an impact in April 2021; the elec- tricity element alone has a regulatory asset value of £13.5 billion. Importantly, too, National Grid's expand- ing US business provides real protection against overly harsh regulatory determina- tions from Ofgem. Some water companies buck the trend Other outperformers in a declining FTSE 100 are the two largest quoted water com- panies, United Utilities and Severn Trent, both of which have accepted Ofwat's final determination. Both companies have also set out new five-year dividend policies – and avoided cuts. Last week, United Utilities held a day- long analyst meeting in London, during which it set out in detail how it would seek not only to meet Ofwat's targets but also to exceed them. The complex Haweswater aqueduct scheme, which takes water from Cumbria to Manchester, featured prominently, along with an unbridled commitment to improve its unimpressive leakage record. Severn Trent's capital markets day at Coventry at the beginning of the month dealt less with financial issues and focused more on how – while satisfying shareholder expectations – it could become an exemplary employer through meeting its wide-ranging environmental, social and governance goals. Severn Trent's message was very different from certain financial excesses previously undertaken by some utility companies. Falling share prices across the market have also enabled the third publicly quoted water company, Pennon, to become a FTSE 100 member. Pennon had a good peri- odic review, as its new status implies. Less successful with Ofwat were three CENTRICA SHARE PRICE, DECEMBER 2019 - MARCH 2020 privatised water companies – Anglian, Northumbrian and Yorkshire – all of which are appealing to the Competition and Mar- kets Authority (CMA) regarding their final determinations. It seems that Northumbrian is exercised about the vexed issue of the weighted aver- age cost of capital. Anglian and Yorkshire, in particular, feel strongly about some invest- ment programmes that Ofwat has decided not to remunerate in full. Bristol Water, a serial CMA appellant, has its own issues to contest, although its record of CMA appeals does not inspire confidence that it can bring about a major U-turn in Ofwat's final determination. Uncertain times More generally, the UK stock market is facing challenging times. Some market commen- tators will argue that normality will return once Coronavirus has been tamed and Opec has reasserted its – admittedly waning – powers to fix oil prices. On the other hand, others will argue that the end of the long-running bull mar- ket is nigh. They will also point to a slew of Coronavirus-related profit warnings that seem certain to emerge in coming months. No one forecast that the combination of a pandemic and a plunging oil price, combined with far lower economic growth, would ambush stock markets. As recently as January, the spring of 2020 had been widely expected to focus on trade deal negotiations in the aŠermath of Brexit. That issue now seems to have been relegated to the media backburner. Nigel Hawkins is the utility analyst at Hardman and Co Note: correct at time of going to press NATIONAL GRID SHARE PRICE, DECEMBER 2019 - MARCH 2020 December 2019 January 2020 February 2020 March 2020 pence per share 100 80 60 40 December 2019 January 2020 February 2020 March 2020 pence per share 1100 1000 900 800

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