European utilities largely exceed expectations during Q1 2023 earnings

European utilities mostly outperformed analysts' earnings expectations in the first quarter of 2023, according to an S&P Global Market Intelligence analysis of S&P Capital IQ consensus estimates, with the exception of coal- and gas-heavy Czech generator CEZ a.s., hydro producer Verbund AG and wind giant Ørsted A/S.

CEZ, which owns a fleet of coal and gas plants and is eyeing more nuclear, had a very strong 2022 by cashing in on high commodity prices.

Hydropower producers with relatively low hedging, such as Austria's Verbund, are facing a more challenging market environment in 2023 due to ongoing drought risks, which are no longer cushioned by the sky-high power prices seen in 2022.

Overall, European utilities are expected to deliver a strong 2023, with a come-down expected after 2022's bonanza but strong performance compared with 2021, according to analysts.

Rising costs, supply chain logjams

Major themes during the first-quarter earnings season included the impact of inflation on capital costs and the continuing pressure on renewable supply chains.

The offshore wind market in particular is adjusting to higher costs of equipment and capital, which may also deliver a turning point in the fierce competition for seabed seen in recent years.

"There's a general realization that [bidding in offshore wind auctions] needs to be financially sane," CEO Mads Nipper said on Ørsted's first-quarter earnings call.

Meanwhile, renewables developer EDP Renováveis SA said solar panel shipment delays have pushed back some of its projects in the US. Germany's RWE AG has also started procuring larger consignments of kit to ensure availability for ambitious capacity targets, both in Europe and in the US.

Spanish renewables giant Iberdrola SA raised its 2023 guidance thanks to higher generation during the quarter.

The first quarter was a curtain call for Enel SpA's long-time CEO, Francesco Starace, who handed the reins to Flavio Cattaneo after a shareholder vote on May 10. Enel's strategy focused heavily on renewables is unlikely to change drastically, observers said.

Fortum Oyj exceeded analyst expectations the most during the quarter. The Finnish utility announced the write-off of its Russian activities, taking a €1.7 billion hit. The move came after the company lost control of the division.

First-quarter results were ahead of consensus due to high power prices in the Nordics during the period. "Excluding Russia comparable operating profit would have increased more than 110%," CreditSights analysts said May 16 in a note about Fortum.

UK's SSE raises investment plan

Britain's SSE PLC reported a strong set of results for its 2023 fiscal year to March 31. Adjusted operating profit came in at £2.53 billion compared with £1.53 billion a year ago, while adjusted EPS was 166 pence, increasing from 94.8 pence in 2022.

Notably, the utility also increased its five-year investment plan by £5.5 billion, with its targeted capital expenditure to 2027 now at £18 billion.

UBS analysts described the guidance as SSE's "best outlook yet," which should give "solid support to the shares over coming months." The company's stock is up 8.71% since the beginning of the year and 6.35% in the past year.

The revised spending plan would take SSE's renewables capacity beyond 9 GW by 2027 and deliver an adjusted EPS compound annual growth rate of 13%-16%, it said.

BofA Securities analysts noted that the strategy update showed SSE's onshore wind and solar returns are resilient, while targeted equity returns in offshore wind were raised to above 11% on higher execution risk.

"We believe diversification outside of the UK should provide optionality for renewables growth to accelerate further," the analysts said in a May 31 note.

Ultimately, SSE's solid full-year results and its amended five-year guidance "should dispel concerns that earnings would fade as the impacts of the energy crisis normalize," the UBS analysts added in a May 24 note.

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