European utilities slash asset valuations
European utilities wrote off a record amount of value from their assets last year, new figures show, bringing the total cost of impairments to more than €100bn in the past six years.
Data compiled by analysts at Jefferies show that 12 of Europe’s biggest energy companies had to reduce the value of their assets — many of them power stations — by just over €30bn in 2015.
This brings the total value of writedowns in the sector to €104bn since the beginning of 2010 — the cost of building the new UK nuclear power station at Hinkley Point nearly five times over.
The impairments swept across the sector as the tumbling price of wholesale power, coupled with an increase in renewables, left coal- and gas-fired power plants worth much less than previously calculated.
Some other companies that invested heavily in renewables then saw the subsidies they expected to receive suddenly cut by domestic governments, especially in Italy and Spain.
In Germany, many companies have been hit by the government’s rapid shift away from nuclear power in the wake of the Fukushima accident in Japan.
Critics also say many companies overspent on mergers and acquisitions in that time, lifting the value of the assets on their books.
Analysts at Jefferies called the value destruction in the past few years “biblical”.
Peter Atherton, who compiled the figures, said: “Utilities went through a golden period from 2002-2010, when rising power prices meant that earnings roughly doubled across the sector.
“They spent most of the proceeds of that buying each other up, inflating asset prices, and what we are seeing now is the deflation of that bubble.”
Since the beginning of the decade, more than 50 gigawatts of gas-fired capacity in Europe — equivalent to 50 nuclear plants — have been closed or mothballed by 10 of the continent’s biggest utilities.
In the UK, Rugeley B last week announced it would become in June the third coal-fired power plant to close in 2016, as low power prices and stricter emissions standards make it increasingly uneconomic to run such assets.
Engie, the company that runs Rugeley, has had to make sharper writedowns than any of its European rivals, partly because it owns thermal power plants around the world.
The company, formerly known as GDF Suez, wrote off the value of its assets by €8.7bn last year as it aims to refocus away from Europe.
Other companies that have had to make similar impairments include Eon and RWE, the German utilities, and EDF of France. Several of these companies, including Engie and EDF, have recently announced cuts to their dividends as they try to protect the value they have.
Jefferies’ research suggests there may be further writedowns to come, but more to goodwill than to the value of physical assets.
Goodwill appears on the balance sheet when a company makes a purchase, and is the premium the purchaser paid above the actual market value of the company or asset that has been acquired.
Jefferies’ figures show eight of the largest European utilities have reduced the goodwill on their balance sheets by €24bn over the past six years. But they also show they still carry €80bn, partly as a result of the M&A spree before the recent downturn.
One company — RWE — was carrying €12bn of goodwill by the end of last year. By the end of last week’s trading, this represented 170 per cent of the company’s market capitalisation of €7.1bn.
Mr Atherton called that figure “extraordinary”. RWE did not respond to a request to comment.