Utility Week

UTILITY Week 16th December 2016

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UTILITY WEEK | 16TH - 22ND DECEMBER 2016 | 19 Finance & Investment Analysis G iven the plunging share prices of recent years, there was a hope that 2016 would mark a recovery – it was not to be. One of the worst performers has been France's EDF, whose shares peaked in November 2007 at over €85. Nine years later, they are below €10, indicating a precipitous fall of almost 90 per cent. EDF is not alone, as other EU utilities have seen a heroic destruction in shareholder value over the past decade. In reviewing the key energy events in 2016, four particular themes grabbed the headlines. First, nuclear power's efforts to re-assert itself in Western Europe have made some progress. To be sure, Finland's Olkiluoto plant will not be operational until 2018, 13 years aer construction started. And the news from EDF's Flamanville new-build nuclear plant is hardly more encouraging. But, in the autumn, the UK government gave the go-ahead to the 3,200MW Hinkley Point C. Completion will be in 2025 at the earliest. Nuclear's supporters will also have been heartened by the recent Swiss referendum, which opposed the premature closing of nuclear power plants. However, in Germany, Italy, Spain and Sweden, the chances of nuclear new-build look remote. Second, the renewable generation sec- tor has faced some daunting challenges of late, especially with the UK's Brexit decision and the election of the controversial Donald Trump – a visceral critic of wind turbines – as the next US president. Concerns about the durability of renew- able generation subsidies persist. None- theless, more such plants are being built. In both the North Sea and especially in the Baltic, German wind power investment will be racked up, as the planned nuclear power close-down in 2022 looms: heavy transmis- sion investment in Germany will also be needed. In the solar space, Germany and Italy are very much to the fore. Third, the construction of electric- ity and gas interconnectors has become more prevalent in recent years, notably in countries, such as the UK, where baseload plant margins are dangerously low. In 2016, major progress was made in pushing ahead with the 720km-long UK-Norway electricity interconnector. Fourth, in 2016 oil prices have begun to recover, especially following the latest Opec agreement. Although Opec is now a shadow of its 1970s pre-eminence, it may succeed in maintaining oil prices around the $50 a bar- rel mark, although recent major advances in US shale extraction have depressed global oil prices. Given the close correlation between oil and gas prices, it is hardly surprising that the latter has also risen of late. While Norway is seen as the ultra-safe supplier of gas, EU utilities are also obliged to buy from less secure exporters, notably Russia and various Middle East countries. In terms of individual EU utilities, few will look back on 2016 with undiluted glee. Much of the action has taken place in Germany, with several corporate events being key. Both of Germany's leading utilities have sought to realign themselves to the changed energy market. While they have established new companies, the mechanics vary significantly. In RWE's case, which has attracted rela- tively more favourable investor comment, it has set up Innogy SE, which includes its core regulated utility businesses and renewable energy plants. Much of the remainder still lies within RWE. Eon, by contrast, has transferred its fossil fuel generation businesses to Uniper, which was floated during the year. Eon itself keeps the cash generative businesses, although it has also been lumbered with the long- Annus horribilis for utilities A decade or so ago, many European utilities were experiencing boom times. But after the financial crisis of 2008, it has been mainly downhill. Nigel Hawkins reports. standing nuclear liabilities – certainly not the outcome it had sought originally. Irrespective of the various corporate manoeuvres, the fact remains that genera- tion prices in Germany remain low. This has seriously depressed RWE's and Eon's returns in recent years. The two French utilities have had very poor years. Shares in both EDF and the recently renamed Engie (formerly Gdf Suez) have fallen by over a quarter: low generation prices and recurring high net debt remain abiding issues. Changes are afoot at Italy's Enel, with its wide-ranging 2017/19 strategic plan. The government may also sell down part of its minority stake. In Spain, Iberdrola has had a disappoint- ing year despite the commissioning of sev- eral new plants. Trump's election as the next US president seems unlikely to be overly helpful as Iberdrola seeks to grow its US renewables portfolio. In Scandinavia, both Vattenfall and Dong Energy have been to the fore. The latter undertook an initial public offering during the summer to finance its aggressive wind- power investment. Finally, aer several torrid years, Den- mark's most well-known renewables busi- ness, Vestas, has had a better 2016, with an improved share price rating. More generally, aer a pretty depressing year, EU utilities will be hoping that 2017 brings considerably more cheer – and much enhanced financial returns. Nigel Hawkins, director, Nigel Hawkins Associates EDF'S SHARE PRICE, 2006-16 100 80 60 40 20 0 Euro 2006 2008 2010 2012 2014 2016

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