European utility execs grapple with offshore wind profitability in Q3 earnings

European utilities largely met analysts' earnings expectations during the third quarter, as the prevailing narrative on earnings calls continued to be the profitability of offshore wind projects in light of rising capital costs.

Danish wind giant Ørsted A/S was the only company in a select group of European utilities to underperform significantly, according to an S&P Global Commodity Insights analysis of S&P Capital IQ consensus estimates.

Ørsted announced a $4 billion impairment to its US offshore wind business in the third quarter and canceled two projects off the US East Coast.

The write-down exceeded analysts' expectations, and Ørsted's share price saw the strongest decline among its peers during October. The challenges also led to the departures of CFO Daniel Lerup and COO Richard Hunter on Nov. 14.

However, observers said they welcomed the new clarity at the company. RBC Capital Markets analysts said the developments "may actually provide better visibility on Ørsted going forward."

"We do not believe that the market ever expected these projects to be built, with none of these projects reflected within the current share price," the analysts said in a Nov. 1 note.

S&P Global Ratings placed Ørsted on CreditWatch with negative implications on Nov. 2, with analysts noting that the company failed to accurately forecast project economic conditions such as interest rates, cost inflation and supply chain issues.

Ørsted also announced a strategic review that analysts said could spell "material changes" on Ørsted's business and financial risk profiles.

Ratings analysts also pointed to risks that Ørsted may be unable to carry out stake sales on wind farms at the same pace as before. "Farm-downs are a critical component of Ørsted's financing strategy, as they have part-financed [capital expenditure] and therefore eased the burden on its balance sheet," they said.

In search of returns

Executives at RWE AG, which also has US offshore wind capacity under development, were keen to distance themselves from the wider industry's troubles, saying the company's offshore wind plans remain profitable thanks to a higher strike price for its Community Offshore Wind project in the New York Bight area.

"The ability for developers to translate capital expenditure into tangible returns against the backdrop of a high interest rate environment and cost inflation remains a highly debated topic," analysts at Jefferies said in a Nov. 14 note about RWE.

British offshore wind and grid developer SSE PLC is ramping up investment in regulated grid networks after seeing unprofitable offshore wind business cases in the UK and Ireland.

"If we feel we can achieve better risk-adjusted returns in networks or flexibility, we will not put through suboptimal renewables projects to reach gigawatt targets," SSE's Chief Commercial Officer Martin Pibworth said during the company's presentation Nov. 15.

SSE refrained from bidding offshore wind projects in the UK's latest round of renewables auctions, which resulted in no support for any new offshore wind capacity.

However, policymakers have shown a willingness to address the cost dilemma for offshore wind with higher strike prices. The UK government on Nov. 16 lifted the bid ceiling for offshore wind by 66% ahead of its next renewables auction in 2024.

Guidance upgrades

Enel SpA upped its 2023 financial guidance while remaining tight-lipped on new CEO Flavio Cattaneo's strategic plans for the Italian gas and power giant. A capital markets day on Nov. 22 should bring more clarity, according to analysts.

Spain's Iberdrola SA increased its full-year outlook, with a renewables ramp-up contributing to higher revenues.

Utilities also increased their spending plans. Britain's National Grid PLC added £2 billion to its five-year capex program, and Germany's E.ON SE increased its 2023 capex guidance by £300 million.

Analysts at Barclays hold a positive outlook for European utilities in the coming quarters. A gradual normalization of the market environment favors integrated utilities, while higher-for-longer rates are putting pressure on project returns, they noted.

"Renewables are our least preferred sub-sector, as we expect higher capital costs and cost inflation to remain headwinds," the analysts wrote in a Nov. 20 note. "Nevertheless, we are positive on solar, which is a bright spot within the renewables complex, where we expect deflationary capex trends to continue."

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