Week 53: Electricity & Gas, Enagas SA, Centrica Plc, and Iberdrola SA

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Welcome to the fifty-third edition of my weekly blog. In volume II, I look at what some of the most sustainable companies in the world are doing to be better corporate citizens.

Introduction
Each week I will analyse three companies from an industry sector to see what policies and procedures they have implemented to make their companies more sustainable. I will also compare these companies’ financial ratios (valuation, growth, yield, leverage etc.) against their industry averages to see if a company can be sustainable and still outperform industry expectations.

1. Enagas SA
Looking at Enagas’ ‘Our commitment to society’ report and its key sustainability figures the following sustainability data is revealed:

• Avoided more than 135,000 tonnes of CO2.
• 620 GWh of energy savings in the use of natural gas.
• 40% reduction in the use of paper over a four year period.
• 23% of board positions at Enagas are held by women compared with global research from multiple sources that show a range between 12% and 15%.
• Provided 65 hours of training per employee.
• No workplace fatalities were reported between 2011 and 2017.
• 1,356 approved suppliers.
• 55 suppliers have been audited against financial, ethical, social and environmental criteria.

2. Centrica Plc
Highlights from Centrica’s 2016 responsibility performance report include:

• 27 million tonnes of CO2 were avoided by customers since 2008.
• Over 60% of waste was diverted from final disposal.
• £35m was spent training UK based engineers.
• 1 workplace fatality reported between 2011 and 2016.
• 18% of board positions at Centrica are held by women.
• Average sustainability risk rating of assessed suppliers has improved from 49 (low risk) in 2012 to 57 (low risk) in 2016.

3. Iberdrola SA
Iberdrola’s sustainability report 2017 tells us the following about their corporate structure and performance:

• 67% of capacity is emissions-free avoiding 63 million tonnes of CO2 over the three years.
• 36% of board positions at Iberdrola are held by women.
• Provided 42 hours of training per employee.
• No workplace fatalities were reported in 2016 and 2017.
• 80% of employees received some form of training.
• 87% of work was awarded to qualified suppliers.
• Over 80% of suppliers are ISO accredited (ISO 9001/ ISO 14001).

​Key Performance Statistics – Company Vs Industry Average
Using Morningstar data, we can compare key performance statistics of the three companies against industry averages:

As you can see in the ‘Advantage by Statistic’ section of the table all three companies are outperforming industry averages with an aggregate score of 22 – 8.

Enagas’ Price/Sales TTM (trailing twelve month), Net Income growth and Debt/Equity levels are below industry averages for gas companies. Although average net income growth for the last three years is well below industry levels, Engas’ net income grew by 17.6% in 2017. Its operating and net margins are well above industry comparators. In 2017 Enagas reduced its net debt by €725m through improvements in working capital collections and less than expected capital expenditure. Enagas expects to be debt free by 2023, its current cost of net debt is 2.7%.

Centrica is behind industry averages for price-to-book, operating and net margin and debt/ equity. This can be explained in the most part by the weaker performance of their energy supply businesses in the UK and US on the back of regulatory and political uncertainty, including plans in the UK to put a cap customer energy bills by the end of 2018. Centrica’s proposed full-year dividend of 12.0p per share is on par with 2016 in spite of weaker financial performance. The 2018 – 2020 outlook is for dividend levels to remain at current levels. The company also plans to continue with its cost reduction initiatives.

Iberdrola’s operating margin of 8.7% is below the industry average of 17.2%, however, its net margin of 9% easily exceeds the industry figure of 5.6%. With the exception of operating margin, the other nine key statistics are ahead of the industry. What could help explain its favourable rating relative to its industry and in particular against all three valuation measures (price/ earnings, price-to-book, price/sales TTM) is the fact that capital expenditure exceeded cash from operations in 2017. An additional €32Bn will be invested in grid, renewables, and generation projects by the end of 2022.

Summary
The three companies have higher than average female representation on their board of directors. Interestingly Iberdrola who has the highest % of female board members performed best compared with industry averages followed by Enagas who had the 2nd highest.

The three companies measure their health and safety performance against the highest standards and treat it as a high priority objective at all times. They invest in their people and assess their supplier’s sustainability performance.

All of this is achieved without their financial performance suffering when compared with industry averages for their respective industries.
Next week’s blog will feature insurance industry companies, and the measures they have taken to be more sustainable.

Learn more
If you liked this article you might enjoy reading the following information:

​Week 52 SASB: An A - Z of the Sustainability Accounting Standards Board
Week 51 United Nations Sustainable Development Goals: Brief overview of the goals
ACCA: The Sustainable Development Goals: redefining context, risk and opportunity
World Benchmarking Alliance: Corporate Sustainability Performance

​Disclaimer
The content of this article is intended to be used and must be used for informational purposes only. It is very important to do your own analysis before making any investment based on your own personal circumstances. You should take independent financial advice from a professional in connection with, or independently research and verify, any information that you find in this article and wish to rely upon, whether for the purpose of making an investment decision or otherwise.