Drivers of Utility Profitability

Table of Contents

• DATAMONITOR VIEW
  • CATALYST
  • SUMMARY
• ANALYSIS
  • This brief reviews the financial performance of 30 leading utilities
    • This brief reviews the financial performance of 30 leading utilities
  • 60% of utilities saw profitability fall in 2006
    • Six of the 10 most profitable utilities have seen their results fall from their 2005 peak
    • RWE and EDF have substantially improved their position from among the least profitable major utilities in Europe
    • PPC and Centrica were the only utilities to make a net loss in 2006
    • Only three utilities have consistently outperformed over the past five years
  • Profitability in 2006 was not a function of performance in prior years
    • Profitability in 2006 was not driven by stable revenue growth over time
    • The most profitable utilities in 2006 have not produced stable profit growth over time
    • The most profitable utilities are not necessarily those with the highest growth in operating cash flow
  • Profitability is not a function of size
    • Economies of scale from the operation of fixed assets do not account for differences in profitability
    • Employee costs are not a driver of utility profitability over time
  • Europe' s most profitable utilities derive income from different parts of the value chain
    • Top-performing utilities show a real diversity in terms of where along the value chain operating income is generated
    • Business units that are big revenue earners tend to contribute less to operating income
  • Accumulation and use of debt does not itself explain the profitability of European utilities
    • Debt leverage does not correlate to profitability
    • From 2002-06, utilities that have outperformed on profit growth do not show a consistent approach to debt leverage
    • Effective use of debt capital over time does not itself explain profit growth
  • Spain, Russia, Denmark and the Czech Republic consistently account for the most profitable utilities
    • In 2006, Switzerland and the UK encompassed some of the most and least profitable utilities
    • Top-performing utilities tend to be less focused on traditional (incumbent) markets
    • Poorly performing utilities tend to be more focused on traditional (incumbent) markets
• APPENDIX
  • Definitions
  • Datamonitor Consultancy
  • Ask the analyst
  • Disclaimer
  • List of Figures
    • Figure 1: Leading European utilities, in order of profitability in 2006
    • Figure 2: Top decile of utilities by profitability (2006), with five-year results
    • Figure 3: Middle decile of utilities by profitability (2006), with five-year results
    • Figure 4: Bottom decile of utilities by profitability (2006), with five-year results
    • Figure 5: The 10 most profitable utilities, 2002-06
    • Figure 6: Revenue growth, 2002-06
    • Figure 7: Growth in net income, 2002-06
    • Figure 8: Growth in operating cash flow, 2002-06
    • Figure 9: Fixed assets and profitability, 2006
    • Figure 10: Revenue per employee and growth rates, 2002-06
    • Figure 11: Operating income by business unit segment, 2006
    • Figure 12: Business unit segmentation of revenue and operating income, 2006
    • Figure 13: Levels of debt leverage, 2006
    • Figure 14: Average growth in net income and debt leverage, 2002-06
    • Figure 15: Average growth in long-term debt and revenue, 2002-06
    • Figure 16: Home markets of the most and least profitable utilities, 2006
    • Figure 17: Proportion of utility revenue from incumbent and new markets
    • Figure 18: Proportion of utility revenue from incumbent and new markets