Utility Week

14 | 28th March - 3rd april 2014 | UtilitY WEEK Finance & Investment Analysis F ollowing the credit crash in 2008, it was significant how many debt-riven banks decided to refocus on their home markets; many overseas operations were prematurely sold. With four of the UK's big six integrated energy companies overseas- owned, there is real concern that a similar scenario could hit the energy sector. A-er all, the macro-economic factors are lousy: dire spark spreads; incessant govern- ment intervention and political uncertainty, manifested by the Miliband price freeze pledge; and the Scottish referendum. For Eon, RWE and Iberdrola, returns from their UK investments remain profoundly dis- appointing, although, in EDF's case, 2013 output from its existing UK nuclear plants was the highest for eight years. Neither are the UK duo, Centrica and SSE, exactly happy. Both have effectively deferred any major investment decisions until a-er the next general election in May 2015. While it is accepted that energy network prices are subject to periodic price reviews, it has been the generation sector that has recently caused real grief for several big six companies, with low usage and totally inad- equate spark spreads. Inevitably, given this scenario – and little confidence that it will change materially for some years – the ques- tion is raised '"why bother with the UK?" For both German companies, especially RWE, this issue is particularly relevant, since its home market – once a haven of safe, long- term returns – has been turned on its head by the sudden political decision to phase out all nuclear plant by 2022. Furthermore, the premature closure of several coal-fired plants, on environmental grounds, leaves both companies severely exposed. Modest though it may be, RWE's UK con- ventional power generation portfolio still chalked up a €76 million (£63 million) loss at the operating level in 2013, compared with a €194 million profit in 2012. Once the inter- est element is stripped out, the underlying losses are even higher, although RWE did report a €290 million operating profit on its UK supply operations. Against this background, RWE's entire modus vivendi is under review. Whether this culminates in either a lower profile in (or an exit from) the UK remains to be seen. There are few obvious buyers for the Npower business. Eon does at least have a valuable port- folio of international activities beyond Ger- many and the UK. As its net debt soared some years ago, there was a real fear that the company had overextended itself, especially in Russia. Its reduction is now paramount. Eon's recent 2013 figures confirmed an Ebitda (earnings before interest, tax, depre- ciation and amortisation) of €9.3 billion, an underlying fall of around 10 per cent on 2012: its mid-range forecast for this year is €8.3 billion. As expected, far lower genera- tion returns are mainly responsible for this shortfall. With the absence of free carbon emissions rights, last year's Ebitda from steam-fired plants was down by 53 per cent. The comparable CCGT figure was a depress- ing 64 per cent lower. Whether Eon's hitherto resolute commit- ment to UK energy abides is uncertain. There are many alternative uses for its capital, notably in markets where economic growth is high and politics less capricious. Judging by its recent strategy update, Iberdrola's commitment to the UK remains robust, or at least to Scotland should Sep- tember's referendum go in favour of inde- pendence. Chief executive Ignacio Galan confirmed that no less than 41 per cent of Iberdrola's expected €9.6 billion net 2014/16 investment budget was earmarked for the UK – a seemingly unequivocal endorsement. He did indicate, though, that new gas-fired gen- eration investment remained on hold until the market recovered. Given that Iberdrola's UK generation and supply returns in 2013 were down 11 per cent at €320 million, this caution is under- standable. Indeed, the generation segment was effectively loss making. Even so, there remains the possibility that Iberdrola could sell part of its electricity distribution opera- tions if a compelling need to reduce its debt suddenly arose. A-er years of negotiation to build a new nuclear plant at Hinkley Point C – with the infamous inflation-adjusted £92.50 per MWh strike price – EDF is hardly likely to run for the hills. However, there is one serious reser- vation. The EU authorities are carefully scru- tinising the massively subsidised price, and UK energy: who wants out? Politicians are fond of accusing energy firms of profiteering. In truth, many of them are weighing up whether it's worth being in the UK at all, says Nigel Hawkins. RWE shaRE pRicE 20 MaRch 2013 - 20 MaRch 2014 (EuRo) cEntRica shaRE pRicE 20 MaRch 2013 - 20 MaRch 2014 (pEncE) 32 28 24 20 420 380 340 300 2013 2013 May May Jun Jun Jul Jul Aug Aug Sep Sep Oct Oct Nov Nov Dec Dec 2014 2014 Feb Feb Mar Mar

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