We are roughly halfway through AMP7, the 2020-2025 water sector investment and pricing cycle in the UK and Wales. We’re also past the price control period for the RIIO-T2 network, so we have a reasonable idea of what utilities are expected to offer to consumers. Generally, you would be hesitant about the prospect of acquiring a company whose pricing and investment mechanisms are subject to third-party regulatory scrutiny. of return. But with rising debt service costs and a net zero obligation on the horizon, could their bond agency status be in jeopardy?
More than 40 years have passed since Stephen Littlechild was asked by the Margaret Thatcher government to design an equitable mechanism to support the privatization of BT. As the professor himself admitted, it was something of a rush job, but his attempt to square the competing interests of consumers, shareholders, and the state was the catalyst for a series of subsequent public utility projects. Provided a template for privatization.
Subsequent events, coupled with a significant expansion of the industry’s balance sheet, can be best described as a reliable stream of income for shareholders. There is no location shown in Last year, industry regulator Of Watt criticized the performance of water and wastewater companies, citing the fact that their operating cash flow is often far ahead of their spending on the business. Fixed assets and network infrastructure. At the same time, net borrowings increased dramatically, presumably to fund financial returns to investors.
This has not gone unnoticed over the years, and there are parallel criticisms directed at power companies. Still, it was the successive hikes in base rates that exposed the indebted utility and called into question its stability. There is no shortage of examples, but Pennon (PNN), owner of South West Water, Bristol Water and Bournemouth Water. As of the September half year, the group’s net debt was £2.94 billion, representing his 248% of shareholders’ funds, or 22% of market capitalization. The group said that in lease/loan repayments, dividends and share buybacks he made £347m in six months, but left the bank with £217m for that period. concluded.
Such waste is by no means characteristic among privatized utilities, but the main threat to shareholder interests, at least in the medium term, no longer has such a political dimension at all. Sir Care Sturmer has pledged not to re-publicize energy and water companies, but the next Labor government will likely reform the role of industry regulators, shifting the balance to favor capital spending over distribution. there’s a possibility that.
Pricing vagaries aside, it is also important (and topical) that energy providers face obligations related to the ongoing energy transition. The extent to which capital can be allocated towards developing new infrastructure is heavily regulated, so shareholder returns may need to be put on the back burner. Reductions in payments can be directed towards developing sustainable energy sources. SSE I adjusted the distribution based on this. Granted, power companies don’t suffer as much from debt problems as water companies, but the government’s commitment to net-zero policies will force their hands on them.
It is doubtful that Little Child anticipated the eventual extent of government intervention when it put together its initial regulatory framework. The expansion of the windfall tax, the Energy Profit Tax, to include utilities suggests that political expediency now reigns over shareholder considerations in Whitehall. As such, the investment case for the broader sector is no longer so simple, as it was centered around reliable income generation.
FTSE 350 Utilities | ||||||
---|---|---|---|---|---|---|
price | market | 12 months | Forward | dividend | ||
company | (p) | cap (£million) | Change (%) | PE | yield (%) | Last IC view |
Bifa | 410 | 1,255 | 23.1 | 17 | 2.1 | Hold, 400p, August 3, 2022 |
Centric | 99 | 5,741 | 36.7 | Five | 0 | Purchased, 89p, July 28, 2022 |
Drax | 643 | 2,577 | 7.3 | 6 | 3.1 | Purchased, 763p, 26 Jul 2022 |
green coat english style | 162 | 3,765 | 14.7 | 6 | 5.1 | already |
national grid | 1,033 | 37,958 | -3.9 | 14 | 4.3 | Pending, 995p, Nov 10, 2022 |
pennon | 934 | 2,439 | -11.4 | 41 | 3.6 | Purchase, 917p, 30 Nov 2022 |
Severn Trent | 2,842 | 7,149 | -1 | 34 | 3.3 | Purchase, 2,717 pence, 22 November 2022 |
SSE | 1,732 | 18,714 | 12.4 | 12 | 4.9 | Pending, 1,712p, Nov 18, 2022 |
telecom plus | 2,035 | 1,617 | 35.3 | 19 | 3.7 | Pending, 2,400p, Nov 22, 2022 |
Renewable Infrastructure Group | 131 | 3,240 | 0 | Ten | Five | already |
united utility | 1,072 | 444 | 1.3 | 45 | 3.9 | Hold, 1,046p, May 26, 2022 |
Source: Factset |