COMPANY WATCH: Is Iberdrola’s UK commitment waning?

The UK’s ‘big six’ energy companies have recently been in the firing line - Ed Miliband’s 20-month price freeze pledge has undoubtedly unnerved some investors.

Add to that the sector’s massive £100 billion + investment programme, most of which the Government expects the ‘big six’ to finance, and it is self-evident that shareholder returns seem set to be squeezed.

Inevitably, serious questions are being posed about the long-term commitment of the UK’s four major overseas energy companies, all of whom have towering debt levels.

Whilst EDF is expected to commit to the construction of a new £16 billion nuclear plant at Hinkley C, both German companies, E.On and RWE, have expressed concerns about their meagre UK generation returns.

Iberdrola, which owns the vertically-integrated ScottishPower and the Manweb distribution business, must surely be reassessing its UK future.

Its current net debt – at almost €29 billion – remains very high given the lacklustre share price performance of recent years, notwithstanding the bombed-out Spanish economy.  

Iberdrola’s UK generation and supply business, which has a capacity of 6.2 GW, remains a real concern: fossil fuel plants account for 4.2 GW of this total, with most of the remainder being renewables.

But the returns are woeful. The first nine months of 2013 showed a €27 million loss at the EBIT level, despite revenues exceeding €6 billion.

Worryingly for Iberdrola, the comparable generation and supply figure for the first nine months of 2012 were even worse, with an EBIT loss of €48 million.

By contrast, Iberdrola’s returns from its networks businesses in Scotland and at Manweb are far more positive and stable, with nine-month 2013 EBIT of €465 million.

The challenges facing the UK generation market are well-known – and have not been helped by ongoing political intervention that would have been unthinkable at privatisation.

And, while the Energy Bill has now been enacted, many key financial variables, such as capacity credit payments, are still unknown.

Hence, there remain a considerable number of risks for any potential investor in UK generation, especially for a company, like Iberdrola, focussing on renewable generation whose subsidy payments fluctuate alarmingly.

Iberdrola also faces challenges on the networks front, with a formidable investment programme within the eight-year long R110-ED1 review.

Its management will have been distinctly unimpressed by Ofgem’s rejection – amongst several other companies – of its initial proposals, mainly due to inadequate outputs and operating cost efficiencies.

A financial predator could argue that Iberdrola was better off exiting the UK entirely and investing elsewhere. Indeed, having found a buyer for its 50% stake in NuGen, it could sell its operating generation plants – albeit at unexciting prices.

By contrast, electricity distribution businesses have fetched top-class prices in recent years, as both EDF and E.On have discovered. Of course, any potential buyer would have to weigh up the risks of the ongoing R110-ED1 review.

As such, Iberdrola’s forthcoming capital markets day on February 19th – when the 2013 full-year results are due to be announced – will attract considerable interest.      

Nigel Hawkins (nigelhawkins1010@aol.com) is a Director of Nigel Hawkins Associates which undertakes investment and policy research