“The defensive nature of utilities may help them outperform other sectors due to investor flight to safety amid uncertainty” in the wake of last week’s ‘Brexit’ vote.
That’s the view of Elchin Mammadov, industry analyst at Bloomberg Intelligence, which has today released research into the impact of the Leave decision.
On foreign exchange and earnings, Mammadov said: “The weak pound may boost earnings of UK utilities such as National Grid or Centrica with overseas operations, while hurting foreign peers with significant UK exposure such as Iberdrola, Dong Energy and RWE.”
He said “investors remain committed to the UK – but Scottish independence poses a major risk”.
Bloomberg suggested Centrica and National Grid may benefit from the British pound depreciating against major currencies, given their overseas businesses, but it added that “the opposite holds true for Sweden’s Dong Energy and Eurozone-based Iberdrola and RWE, which generate significant revenue from the UK. The utilities limit the negative impact of a weaker pound on earnings and cash flow through near-term currency hedging. Their pound-denominated debt also provides a partial hedge through lower interest payments in euros.”
Mammadov noted that executives at European energy firms, including Engie chief executive Isabelle Kocher, have said that they regret the British people’s decision to leave the EU. “Yet, they say their companies remain committed to the UK. EDF is among those that say its strategy won’t change, while RWE says it doesn’t expect major UK trade hurdles. A weaker pound is seen as a major risk, but may be mitigated by the fact that Britain represents only a fraction of overall earnings for many international utilities, such as Engie, EDF, and E.ON.
But Mammadov did stress that Brexit “raises the risk of further delay or cancellation to EDF’s Hinkley Point C nuclear project amid uncertainty over the future of the British government and energy policy. This could also delay RWE and E.ON’s planned sale of their 33 per cent stake in Urenco, where the UK government holds a 33 per cent share.
Bloomberg anticipates that the UK “will keep attracting investment in energy and water infrastructure despite its vote to leave the EU. The UK is an attractive investment destination amid stable energy-network and water regulation. Unless it reneges on its environmental commitments, the UK will have to offset nuclear and coal-fired power plant closings with new gas-fired units and offshore wind farms and new power lines with Europe. Thus, renewables and interconnector projects may be delayed, yet will eventually proceed, despite Brexit.
And Mammadov said that despite the Brexit vote, the European Investment Bank will continue funding loan contracts relating to UK energy projects that have already been approved. He noted that the UK, France, Germany and Italy each hold a 16 per cent share in the EIB and added that according to an EIB spokesman, the bank will continue to appraise new projects on a business-as-usual basis “unless and until a decision to change lending activity is taken by the EIB’s shareholders”.
On the subject of a second Scottish independence vote arising from the vote to Leave, Mammadov said that “independence would pose several risks for utilities operating in Scotland, ranging from uncertainty over whether the rest of the
UK would continue to pay it subsidies, or over future tax implications and the treatment of pension liabilities”. He highlighted that SSE, Iberdrola and Dong Energy are among the publicly-traded power utilities operating in the UK with the most exposure to Scotland.
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