EY - Benchmarking European utility asset impairment

Benchmarking European power & utility asset impairments

Lessons from 2012

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With more than €30b of assets and goodwill impaired over the last three years, the power and utilities sector has already paid a high price for the economic and financial crisis.

The numbers are striking, but they don’t tell the entire story. We delve deeper into financial reports for 2012 to assess the trends at work — and the likelihood of further pain to come.

In tracking impairments at 16 major European power and utility companies1 since 2010, we have highlighted the shifting factors that influence the annual impairment exercise, and how challenging it is to make decisions and communicate on the topic with stakeholders in a meaningful way.

Impairments totaled €12.8b in 2012, up 38% on the previous year. This upward trajectory doesn’t paint the brightest picture for the sector, but it’s hard to say with certainty whether the trend will continue in 2013.

In this report, we:

  • Analyze impairments booked by our sample of 16 companies in the 2010, 2011 and 2012 financial years
  • Examine the rationale for write-downs that these companies present in their annual report and accounts
  • Explore how key external forces ― supply, demand, commodity prices, policy and financing conditions ― may continue to trigger additional impairments
  • Compare the 2011 assessment of risk with actual impairments booked in 2012, to explore what’s changed

“2012 saw confirmation of a change in the way utilities viewed their assets. With poor energy demand and volatile commodity prices, nearly 13b of impairment went through the books. Companies took hard decisions to close plants and reconfigure portfolios. This is a new normal and, at least for now, there is no going back to previous assumptions.”

— Charles-Emmanuel Chosson,
Global Assurance Power & Utilities Leader,

Balance sheet cleanup continues

Power and utility companies cleaned up their balance sheets with significant asset impairment in 2012. They reacted realistically to changing local business environments and market fundamentals, in some cases taking hard decisions to close down plants and reconfigure their portfolios.

Compared to 2011 reporting, disclosures show that there has been a striking evolution, particularly concerning:

  • The nature of assets impaired
  • The locations most affected
  • The rationale for posting impairments

But comparing 2011 disclosures with the 2012 impairments number, there seems to be a mismatch between companies’ statements about the risk of future impairment one year, and the size of impairment that goes through the books the next year.

Disclosures in 2011 indicated that the risks of further impairments were limited. Despite this positive message, in 2012 our sample of companies posted a record high level of asset and goodwill impairment. This casts doubt on the predictive nature of sensitivity analysis disclosed in annual reports. Once again, companies are indicating limited risk of further impairment.

Is there light at the end of the tunnel?

It is very hard to say whether we can expect to see further big impairments in 2013. We know that economic and operating conditions remain difficult, contributing to a much more uncertain environment than even last year.

Despite signs of slight improvement, complex underlying economics will make the upcoming impairment exercise — which many European utilities will do in the third quarter of 2013 — particularly tough.

Nevertheless, power and utility finance leaders can take the opportunity to reinforce, and potentially extend, the information they disclose about the assumptions on which they base impairment testing.

The more transparent they are, and the more willing they become to disclose precise underlying numbers, the greater shareholder confidence will be in their ability to anticipate future impairment.

1Centrica, 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.