European utility balance sheets reflect several years of volatility in market and operating conditions. More than €17.7 billion was written off assets and goodwill in 2010 and 2011. So what do the numbers tell us ― and is the impairment cycle coming to an end?
Now that the 2011 financial results are out, investors have a clearer picture of how ongoing economic and financial turbulence has impacted power and utility companies.
The profitability of large integrated utilities continues to suffer, but the good news is that utilities have been cleaning up their portfolios, recognizing more than €17.7 billion of impairments in 2010 and 2011.
But these numbers don't tell the whole story. The assumptions companies make when valuing an asset differ widely, depending on its nature, geographic reach and operating performance. This means impairments booked by different utilities can look very diverse.
Looking for clear comparisons and hints of what's to come
We've developed this publication to help power and utilities prepare for the next round of impairment exercises.
To establish a clear picture of the present, and what might happen next, we analyze impairments booked by 16 large integrated European utilities in the 2010 and 2011 financial years.1
We look in detail at how each company explains its rationale for write-downs in the annual report and accounts. We also assess the risk factors and sensitivity analysis they disclosed in 2011, and how key external forces ― supply, demand, commodity prices, policy and financing conditions ― may continue to push asset values down and lead to more impairment.
Benchmarking utility communications in this way is rarely done, and highlights an interesting mismatch.
Some companies have already significantly reduced the value of assets and goodwill in their balance sheets, and the information disclosed in 2011 annual reports suggests further risks, but at present utilities still seem positive overall. Meanwhile, key external drivers affecting profitability are evolving in a generally negative way.
Given that economic and financing conditions are so volatile across Europe, we believe European utilities may not be in the clear yet. They need to keep challenging their thinking around impairment, and communicate with stakeholders to make sure they head off negative surprises if conditions do not improve before the end of 2012.
Ernst & Young's Power & Utilities Assurance and Valuation teams have deep knowledge of these highly complex issues and challenges. We are dedicated to helping you assess the consequences of asset impairment for business and accounts. Please talk to your Ernst & Young advisor or contact one of this paper's authors to discuss the issues raised.
1 Centrica, CEZ, EDF, Energias de Portugal (EDP), E.ON, Enel, Fortum, Gas Natural, GDF Suez, Iberdrola, RWE, Scottish and Southern, Suez Environnement, Vattenfall, Veolia Environnement and Verbund.