Limited utilities

Those wondering what deleveraging sounds like in practice should forget about Europe’s banks and focus on the region’s utilities. It is here that the gears going into reverse are most audible. In the past few days RWE, Iberdrola, Eon and Enel have provided evidence that the years of debt-fuelled expansion of the European utility sector are over. Europe’s economic slowdown, Germany’s retreat from nuclear power, and higher borrowing costs mean that austerity is the new watchword. It is a dangerous moment for a top-heavy sector.

The most striking evidence that European utilities need to restructure is the hit to earnings. Eon’s earnings before interest, tax, depreciation and amortisation for 2011 were €9.3bn – almost a third below the 2010 level. RWE’s were
18 per cent down; Enel’s were flat. Though the results were roughly in line with lowered expectations, they all contained plenty of signs that utilities no longer provide the kind of stable, visible earnings growth that used to define them. That was confirmed by the fact that few of them offered any guidance (either positive or negative) for 2012.

The most urgent measure by which Europe’s utilities should be judged, however, is debt. The main reason they need to downsize is that they all to a greater or lesser degree carry too much debt. Eon’s net debt was €36bn at the end of 2011 – just under four times ebitda; RWE’s was €30bn, or 3.5 times 2011 ebitda. Enel’s €45bn of net debt is 2.5 times 2011 ebitda; the Italian company has reduced its dividend payout ratio from 60 per cent to 40 per cent up to 2016 as it seeks to reduce the headline debt to €30bn.

The sector’s restructuring is far from being complete: Eon is about two-thirds of the way through a €15bn disposal programme. But the early results are in: Eon’s shares are 40 per cent ahead since last September, and RWE’s are up by two-thirds, reflecting optimism that turnrounds are on track. Utilities are often proxies for their sovereign overlords. For evidence that austerity works, watch this space.

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