Loss of Espoo’s electricity portfolio in the millions following stock exchange falls

Neighbouring energy companies doing much better than portfolio managers

print this

The fund established by the City of Espoo following the sales of its electricity supplier has experienced a bleak start, while the decision made by the Espoo City Council in 2005 to abandon having an electric utility of its own now does not look so fortunate after all.
     
The City of Espoo sold its remaining shares in electricity supplier E.ON Finland to the state-owned energy company Fortum for approximately EUR 365 million in 2006.
      The millions were given to six professional portfolio managers, with a goal to gain an annual profit of around 6 % in the stock market.
     
The aim was to increase the value of the electricity portfolio for six years, whereafter the City Council would decide in 2012, whether or not the profits should be used for some purpose. An initial plan was that the assets could be used for basic services and land acquisitions.
      It was also agreed that the initial capital should remain untouched.
     
”The EUR 365 million will have to be left to future generations, which is why we have chosen the best portfolio managers in the world”, reported Espoo Mayor Marketta Kokkonen in October 2006.
      The portfolio managers are independent, while following the instructions of the City Board. The investment method is the same as the one applied to the employment pension funds. The objective is to achieve an even profit avoiding too much risk-taking.
     
In 2007, Espoo’s portfolio showed a zero-profit (0.13%). This year, the fall in the market sliced 5% off the value of the portfolio over the period from January through July.
      The total stock portfolio has gone down by EUR 18 million.
      The trend has been normal, when compared with the investments made by for example employment pension companies, although they, too, have managed to outperform the Espoo portfolio managers, even in hard times.
      ”The result is not good, but it is at the same level with other similar investors. Nevertheless, there is no reason to reduce the average annual yield target of 6%”, says Reijo Tuori, the head of finances in the City of Espoo.
      However, compared with the profits made by the electric utilities in the neighbouring cities of Helsinki and Vantaa, Espoo’s electricity fund project has been even less successful.
     
The going in the electricity market has become so lucrative that in densely populated areas in particular, sales of energy have become a veritable goldmine.
      An extreme example is Helsingin Energia, with its all-time record profit of EUR 290 million in 2007.
      Both Helsingin Energia and Vantaan Energia recorded a return on their capital in 2007 of more than 20%. Over the period from January through June this year, Helsinki Energia’s return on investment was 12 %.
      They have paid their city owners record sums, and in the current year their performance is likely to improve further.
     
One could speculate that the former Espoon Sähkö, which was somewhat bigger than Vantaan Energia, could have been transferring several tens of millions back to the City of Espoo in the present electricity market.
      Not unnaturally, there is some dissatisfaction among members of the city council over the current embarrassing gap between Espoo and its neighbours in this respect.


Previously in HS International Edition:
  City of Espoo to sell its E.ON shares to Fortum (21.12.2005)
  Fortum to go to court over dispute over option to buy E.ON Finland (26.1.2005)
  Fortum wants to buy Espoo electric utility (18.1.2005)

Helsingin Sanomat