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European P&U Newsletter for Q1 2019

European P&U Newsletter for Q1 2019

Price and margins overview

Electricity Prices

Peak and base load prices in France, Germany, Spain and  the UK continued to decline after the seasonal peaks observed in the fourth week of January up to mid March. The decline was mostly due to weak demand as a result of mild weather conditions and also due to higher renewable generation owing to abundant wind generation during the quarter.

Oil Prices

Brent and WTI crude prices increased by 13 percent and 12 percent, respectively, during the quarter (January to March 2019), reaching US$67.58/barrel and US$60.14/barrel at the end of Q1 2019. The oil prices rose due to production decline from Venezuela and Iran, accompanied by optimism surrounding the negotiations between China and the US. However, prices were negatively impacted by rise of US oil stocks during the quarter.

Gas Prices

Average prices of Henry Hub, EU border and NBP declined by nearly 25 percent q-o-q. The prices were impacted by forecasts of mild weather and high levels of European gas storage, along with the decline of spot contracts and bearish movement of coal and carbon prices. The prices were supported by a rise in oil and CO2 prices during the quarter.

Coal Prices

Coal prices rose in the beginning of January, influenced by the prospects of cold weather and signs of rising demand, but later continued to decline till the end of the quarter. Average Australian coal prices declined by 7.6 percent q-o-q and African coal prices declined by 11.5 percent q-o-q. The fall was due to low demand, high level of renewable generation in Germany, weakness of the Asian market and high inventory level at import terminals across Europe.

Carbon Prices

Carbon prices increased initially in January to EUR25.0/T, as the market sentiment recovered following the `Brexit vote' due to rise in energy prices amid expectations of the cold wave hitting EU. The prices continued to decline till the end of February, triggered by the apprehensions of a `no-deal Brexit' and the absence of compliance buyers. Prices increased in the first week of March, due to renewed compliance and speculative buying, but were negatively impacted by decline in coal and gas prices, accompanied by strong market supply.

Dark/ Spark Spreads

During the quarter, clean spark spreads were more attractive than clean dark spreads in many parts of Europe including France, Germany, Spain and the UK. Since the end of January, gas-fired power has become considerably more profitable than coal, resulting in switching of power plants from coal to gas.

Regulatory and economics news overview

European Union

Natural Gas

Liquefied Natural Gas (LNG) imports in the European Union (EU) posted a strong increase of 126 percent in Q1  2019 compared with Q1 2018.

Electricity

Falling gas spot prices led to the intensive coal-to-gas switch across the EU power market in Q1 2019, as coal  was disadvantaged by relatively high carbon prices. Uncertainty surrounding the Brexit issue was the main  factor influencing CO2 prices, which fell 14.3 percent during the quarter. Despite this, the prices were still twice  as high as in March 2018. Wholesale electricity prices fell across the EU markets, due to mild weather  conditions in February and March, accompanied by lower energy commodity prices and good renewable output.  The Renewables sector continued to increase its share in the power mix and reached 31 percent, mainly due to  strong wind generation.

UK

Confirmation of sector deal in offshore wind

On 7th March 2019, the UK government published its Offshore Wind Sector Deal — Sector Deal between the  government and the Offshore Wind industry. The UK aims to achieve 30GW of offshore wind generation by  2030, up from 8GW in Q1 2019, thus covering one-third of Britain’s electricity demand from offshore wind. By  2030, the government stated that, by 2030, it aims to create 20,000 new skilled jobs in the sector and raise the  number of women entering the industry by twofold. This Deal will mean there will be more electricity from  renewables than fossil fuels, with 70 percent of British electricity predicted to be from low carbon sources by  2030.

Germany

The entry in the coal exit

The Commission on Growth, Employment and Structural Change has decided to exit from coal, latest by 2038.  On 31 January 2019, the commission presented the final report to the Federal Chancellery. The Commission  has agreed on EUR40 billion support for the federal states, which are expected to be affected by the coal exit.

The Federal government passed a regulation for the development of LNG (Liquefied Natural Gas)  infrastructure on 27 March 2019.

France

The project ‘Climate Energy’ passed as a law by the House of Representatives

The 2019 law reinforces the objectives already in place in the 2015 Energy Transition law, which is the founding  regulation for energy and climate. Following are its main objectives to achieve carbon neutrality by 2050:

  • Reducing the share of fossil fuels: The new target is 40 percent reduction in fossil fuel use by 2030, compared  with the former 30 percent target.
  • Eliminating the ‘thermal colanders’ (buildings with poor energy performance) with a three-phase approach:     – Developing existing subsidies     – Introducing compulsory improvements by building owners and tenants     – Implementing binding mechanisms
  • The reduction of nuclear power share in power production, down to 50 percent by 2035 instead of earlier  target of 2025
  • Better monitoring of energy prices

Spain

In January 2019, the Royal Decree Law 18/2019 was approved, which clarifies issues about the request,  allocation and trade of free greenhouse gas emission rights for the 2021–30 period.

In February 2019, the Spanish Ministry of Ecological Transition (MITECO) submitted a draft of the NECP  (National Energy and Climate Plan) for the 2021–30 period to the European Commission. The NECP sets  ambitious targets, aiming for fast energy system transition.

In March 2019, the government announced that it will restore tax on the production of electricity, 7 percent tax  on electricity production, effective from the second quarter of 2019.

Portugal

The Regulatory Entity for Energy Services (ERSE) approved the directive that defines the reference price  methodology of the tariff for the use of natural gas transmission network, the discount to be applied at entry  and exit points of storage facilities and the discount to be applied to normalized interruptible capacity products.

Italy

The ARERA (Italian Regulatory Authority for Electricity Gas and Water) announced an update to the guaranteed  minimum prices for the electricity produced from renewables for 2019. These prices were raised by 1.1 percent,  following the rise of the consumer price index by the same percentage.

The Netherlands

The Dutch government will close one of its five coal-fired power plants next year, four years earlier than  planned, to reach its climate goals. The decision follows a 2018 court order instructing the government to ensure  greenhouse gas emissions are reduced from the 1990 levels by at least 25 percent by the end of 2020.

The Dutch government announced a carbon tax for companies. Proposals to fight climate change put forward in  recent months will cost the Netherlands about EUR 5.2 billion (US$6 billion) over the next decade, but will fall  short of achieving a 49 percent CO2 emission reduction goal by 2030, the CPB advisory body said.

Capital Markets Overview

Eurostoxx Utilities

The Eurostoxx Utilities index increased by an average of 8.9 percent q-o-q. The index cumulated 10.2 percent  gains in the last 12 months.

Best Performance

RWE AG, Enel SpA, Snam SpA, Endesa SA, Iberdrola SA and ENGIE SA registered the best performance in  Q1 2019, in terms of share price behavior. During this period, 15 of the top 18 European players experienced  positive price evolution.

Vaulation levels

RWE AG, Enel SpA, Snam SpA, Endesa SA, Iberdrola SA and ENGIE SA registered the best performance in  Q1 2019, in terms of share price behavior. During this period, 15 of the top 18 European players experienced  positive price evolution.

Net debt ratios

Net debt ratios averaged at 3.2x EBITDA, 6.7 percent above the figure registered in Q4 2018 (3x EBITDA).

Credit ratings

In March 2019, Enagás, S.A. and Centrica Plc observed a downgrade in its S&P’s rating to ‘BBB+’ and ‘BBB,’  respectively. Red Eléctrica Corporación also observed a downgrade in its Fitch’s rating to ‘A-’. In February  2019, Enel SpA and Endesa, S.A. observed an upgrade in their Fitch’s rating to ‘A-’.

Global M&A overview

Main Trends

The biggest deals during Q1 2019, comprised companies mostly from the US and China. Total value of the  top 15 deals amounted to EUR20.74 billion. Most of the deals involved companies having operations in  Renewables and New Energies like wind, solar and hydro power plants.

Top deals constituted mostly power generation and distribution companies with the objective of improving  business operations through expansion, portfolio diversification, capacity enhancement, R&D and cost control.  Some deals focused on strategies to achieve the climate protection targets through energy transition toward  renewables, while simultaneously generating steady cash flow.

Main transactions

Hanergy Mobile Energy Holding Group, the Chinese thin film solar products manufacturer, has agreed to  privatize Hanergy Thin Film Power Group, using share replacement instead of cash scheme. The HKEX listed  affiliate is engaged in thin film solar products.

China Power International Holding, operating through its subsidiary, China Power International Development  Limited, has agreed to privatize, China Power Clean Energy Development Co Ltd, its 28.07 percent owned listed  affiliate engaged in development, construction and operating of clean energy power plants.

A consortium of Commerz Real AG, wpd invest GmbH, KGAL GmbH & Co. KG and Ingka Holding B.V., has  acquired approximately 80 percent stake in Veja Mate Offshore Project GmbH, a Germany-based 402 MW  offshore wind farm located in the North Sea. The acquisition will support Commerz Real to achieve the 2020  target of — renewable energy production exceeding the energy consumption.

ENMAX Corporation, a Canada-based company engaged in the provision of electricity, natural gas and  telecommunications services, has signed a definitive agreement to acquire Emera Maine from Emera Inc., a US-  based company that provides electric delivery services. The acquisition is part of ENMAX’s strategy to grow  through the expansion of its regulated utility business in North America.

Total Eren, a France-based company engaged in developing and operating wind, solar and hydro power  plants and a subsidiary of Total S.A., has agreed to acquire NovEnergia II, a Luxembourg-based renewable  energy assets operator, for an estimated consideration of EUR600 million. The transaction will enable Total  Eren to strengthen its presence in Europe.

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