European utilities will trim dividend payments, accelerate asset sales and cut costs next year to manage debt in a weak economy, a report by consultant Capgemini NV said.
Stagnant power and gas consumption will keep hurting utilities balance sheets as long as the sovereign crisis remains unresolved, the study published today said. Debts accumulated in the pre-crisis years will force them to accelerate the sale of assets in 2013 to Chinese investors and Australian and Canadian infrastructure and pension funds.
“Utilities are trying to cut expenditures everywhere, all companies have cost-cutting programs,” Colette Lewiner, author of the study and head of utilities at Capgemini, said in an interview. “There will be more divestments because if you need to restore your business, there’s nothing else you can do.”
The Portuguese government sold a 21 percent stake in EDP (EDP) to China Three Gorges Corp. for 2.7 billion euros ($3.4 billion) at the end of last year, while in February it disposed of a 40 percent stake in electricity transport operator REN (RENE) to State Grid International of China and Oman Oil Co. (OOMS)
Money on the Table
“We need capital and they have it,” Lewiner said about possible investors outside Europe. “Those funds have money and they have decided to invest in infrastructure. They are ready to put their money on the table.”
As companies finance current operations and invest an estimated 1.1 trillion euros in power generation, transmission and distribution by 2020, they will continue cutting costs. The biggest challenge will be firing people, especially in countries like France, Lewiner said.
While utilities are trying to protect dividend payments, they are likely to come under pressure as companies try to shore up balance sheets, she said.
From 2011 until mid-July 2012, the sector has underperformed the broader equity market by around 11 percent, the study shows.
EON SE’s shares plunged last week the most since the company was formed in June 2000 after the Dusseldorf-based company said it may have to cut dividends and close power stations because of lower electricity prices in Germany.
“They are very negatively impacted by the decision of closing nuclear plants,” Lewiner said. “E.ON is also impacted by a real gas problem in Europe, because they are less profitable than coal plants.”
Following Japan’s Fukushima disaster, German Chancellor Angela Merkel ordered the permanent halt of all nuclear reactors by 2022. EON said its 2013 profit forecast is no longer achievable and that its disposal program may exceed the originally targeted 15 billion euro.
German utilities “had to include the nuclear plants dismantlement costs in their balance sheets earlier than expected and had no choice but to sell non-core assets in order to compensate,” the Capgemini report says.
Germany’s second-largest utility RWE AG (RWE)’s net debt increased by 14 percent at the end of the third quarter. RWE is seeking to reposition itself after the German nuclear decision, Capgemini said.
RWE’s Executive Board Member Bernhard Guenther, who is due to take over as chief financial officer in January, said it is “hard to predict whether our divestments will be sufficient to achieve the desired reduction in our leverage factor,” as the company is going through a 7-billion euro asset disposal program.
“It’s difficult to say when the utility companies will reach the bottom because it is quite dependent on when we get out of the crisis,” Lewiner said. “It is going to be difficult, we don’t hear about the economy rebounding, and 2013 should be similar to 2012.”
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