European Power & Utilities Report – Q4 2017 | KPMG | GLOBAL
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European Power & Utilities Report – Q4 2017

European Power & Utilities Report – Q4 2017

Price and margins overview

Electricity prices

Prices across Continental Europe peaked in late November due to cold, dry and low wind weather conditions, driving up peak-load differentials. This situation reversed during December, bringing prices down to September levels. As a consequence, average Q4 prices were significantly above Q3. UK electricity prices, less dependent on renewables, experienced continuous increase in the quarter following the upward trend of natural gas.

Oil prices

Both Brent and WTI Oil prices continued the upward trend started during the Q3, reaching at the end of the quarter 64 and 58 $/bbl respectively (up from 58 and 52 $/bbl in October).

Gas prices

While Henry Hub average prices during the quarter fell by 2.1 precent (reaching 2.8 $/MMBTU at the end of December), Both EU border and NBP prices increased (17 precent and 25 percent, respectively).

Coal prices

Both Australian and Colombian Coal prices increased during Q4 2017. Australian Coal led this trend and reached an average price of 99 $/mt in Q4 (5.6 percent above the previous quarter). South African Coal average quarterly prices fell by 2.1 percent in Q4 compared to Q3.

Carbon prices

Carbon prices continued to rise during the quarter, reaching 8,2 €/T at the end of December. Average quarterly carbon price was up 27 percent vs Q3.

Dark/spark spreads

Dark and spark spreads experienced strong volatility in Continental Europe, with high peaks in late November as electricity prices decoupled from gas and coal. The situation reversed by year end, bringing spreads back to negative values. The UK was not affected by this trend as spreads remained at close to zero values during the quarter.

Regulatory overview

European Union

A new regulation aimed at improving the security of gas supply in the EU entered into force on 1 November. The European Commission also announced that it is considering to amend the existing Gas Directive (2009/73/EC) with the aim of extending the common EU gas rules to all import pipelines.

France

Law 2016-1839-1839 was enacted, ruling that no more research permits and xxploitation concessions will be granted to both traditional hydrocarbons, as well as to shale oil & gas. The French parliament issued a legislative empowerment to the government to improve the granting of off-shore concessions. The legal maximum delay would be decreased to a maximum of 7 years, down from a current average of 10 years.

Germany

The Federal Network Agency announced on 22 November 2017 the bid results for third auction for Onshore Wind Energy which took place on 2 November 2017 and was characterized by a 10 percent drop of the award prices in comparison to previous rounds. In the auction procedure, the Federal Network Agency awarded 61 bids with 1,000.4 MW. The average award price was 3.4 ct/kWh.

Italy

The Government has launched the National Electricity Strategy (SEN). Among the guidelines of the document there is the goal of renewables to 28 percent of total consumption by 2030 and 55 percet of electricity consumption, arriving in 2025 zero coal in the production of electricity.

Nordics

In 2017, 43.4 percent of the entire Danish electricity consumption was generated from wind energy. The Danish wind energy industry has strongly contributed to a development where offshore wind now is becoming more competitive. This has resulted in a subsidy-free outlook to coming offshore wind farm tenders from regimes in the region.

Portugal

The Secretary of State for Energy has determined the discount equivalent to 33.8 percent, to be applied in access tariffs to electricity networks, applicable as from 1 January 2018. The Secretary of State for Energy also declared the partial invalidity of Order No. 11566-A/2015, determining that it is not allowed to include the impact of CESE and Social Tariff in the UGS tariff.

Spain

CNMC proposed various measures for improving the liquidity of the market (e.g. development of a futures market), and it also suggested that the dominant players (Gas Natura and Endesa) act as market makers. The Ministry of Energy, Tourism and Digital Agenda followed these suggestions by issuing a resolution which establishes the conditions that apply to the dominant players in the market for natural gas which are obliged to assume the role of market makers.

United Kingdom

The Dept. of Business, Energy and Industrial Strategy released its Clean Growth Strategy, outlining the plans to meet the Carbon Budgets to 2032. The Autumn Budget confirmed the continuation of the carbon price into the 2020s at a similar level to today, re-confirmed the £557m of allocated funding for further Contract for Difference (CfD) auctions for renewables, introduced a new ‘Control for Low Carbon Levies’ framework and announced £400m of funding to support electric charging infrastructure. A Tariff Cap Bill was issued in October 2017; designed to enable Ofgem to implement an absolute price cap on standard variable tariffs.

United States

The Secretary of Energy issued a statement in relation to the Regulatory Review Report published by the Department of Energy (DOE) pointing out the main hurdles to domestic energy development and use, and offered recommendation addressing the former. These recommendations entailed: streamlining natural gas exports, and reviewing the national laboratory policies, the National Environmental Policy Act (NEPA) and the DOE Appliance Standards Program.

Capital markets overview

Eurostoxx utiltities

Eurostoxx Utilities index increased an average of 3.48 percent Q-o-Q. The Index gained 22.36 percent in the last 12 months.

Best performance

EDF, Fortum and CEZ registered the best performance in Q4 2017 in terms of share price, in a quarter where half of the top 18 European players have experienced a positive Q-o-Q price evolution.

Valuation levels

Valuation levels in the sector averaged at 8.0 EV/EBITDA in Q4 2017; 1.3 percent higher than the previous quarter. Wide differences persist in EBITDA multiples, with Enagas, Fortum, Snam, Centrica and Iberdrola receiving highest valuations, trading above x11 EV/EBITDA.

Net debt ratios

Net debt ratios averaged at 3.4 x EBITDA in Q4 2017, 8.7 percent higher than the figure registered in Q3 2017 (3.1 x EBITDA).

Credit ratings

S&P made the only changes in credit ratings in the European sector during the quarter with the upgrades of Snam, Enel and Endesa to BBB+.

Global M&A overview

Main trends

The last quarter continued to show a very active M&A market. The total value of the top 10 deals exceeded 30 bn € with a broad diversification of subsector (oil, gas, infrastructure, renewables, water…) The largest deals during Q4 2017 targeted mostly US companies (5 deals in the top 10).

Main transactions

  • Acquisition of Rice Energy, Inc., a US-based natural gas exploration and production company by EQT Corporation (€6,875m).
  • The sale of Veresen Inc., a Canada-based owner and operator of energy infrastructure business to Pembina Pipeline Corp (€4,683m).
  • Purchase of 38.84 percent stake of TerraForm Power, Inc., a US-based owner and operator of clean power generation assets serving utility, commercial and residential customers by Brookfield Asset Management Inc. (€4,013m).
  • Acquisition of Suez Water Technologies & Solutions, a US-based supplier of water and provider of waste water and process systems solutions by Caisse de Depot et Placement du Quebec (€3,200m). 
  • The sale of a set of the North Sea oil and gas assets from Shell UK Limited to Chrysaor Holdings Ltd (€2,818m).

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