Networks and value in Integrated utilities

Table of Contents

• DATAMONITOR VIEW
  • CATALYST
  • SUMMARY
• ANALYSIS
  • This brief analyses data from 16 leading European utilities
  • Reliance on networks-derived revenue is not tied to a utility' s size
    • The average utility derives one fifth of its revenues from networks
    • Utilities that are most reliant on network revenue tend to be gas-focused
  • Networks businesses have higher operating margins than overall utilities
    • The median operating income from a networks business unit is 31%
    • The operating margin in networks businesses is higher than for utilities overall
    • There is no consistent relationship between profitability and the proportion of a utility' s business that focuses on networks
    • There is no direct relationship between the level of liberalization in a market and operating margins in utility networks businesses
  • A utility' s focus on networks does not consistently drive credit ratings or debt leverage
    • There is no consistent relationship between credit ratings and the proportion of a utility' s business that focuses on networks
    • There is no consistent relationship between debt leverage and the proportion of a utility' s business that focuses on networks
    • There is no consistent relationship between a utility' s fixed asset base and the proportion of its business that focuses on networks
  • TSOs outperform integrated utilities on ROA
    • There is a loose correlation between a utility' s focus on networks and its ROCE
    • There is no relationship between a utility' s focus on networks and its ROA
    • Utilities with a particularly strong focus on networks have seen a steady fall in ROA over the past five years
    • Utilities with a strong focus on networks income have seen a sharp increase in ROCE since 2005
    • TSOs have higher returns on assets than the average integrated utility
  • Networks focus reduces share price volatility, but can be eclipsed by other factors
    • National Grid' s shares are less volatile than the overall stock market
  • RWE' s shares are less volatile than the overall stock market
  • EDF' s shares are significantly less volatile than the overall stock market
    • E.ON' s shares are more volatile than the overall stock market
• APPENDIX
  • Definitions
  • Further Reading
  • Datamonitor Consultancy
  • Ask the analyst
  • Disclaimer
  • List of Figures
    • Figure 1: Utilities under analysis, with network business unit definitions
    • Figure 2: Network revenue as a proportion of total utility revenue, 2006
    • Figure 3: Gas versus power focus of utilities, and proportion of revenue from networks, 2006
    • Figure 4: Network operating margins, 2006
    • Figure 5: Whole utility versus networks business unit operating margins, 2006
    • Figure 6: Utility focus on networks and profitability, 2006
    • Figure 7: MCI scores and network business unit operating margins, 2006
    • Figure 8: Relationship between credit ratings and utility networks focus, 2006
    • Figure 9: Relative size of network business units and utility debt leverage, 2006
    • Figure 10: Relative size of a networks business unit and utility fixed assets, 2006
    • Figure 11: Utility focus on networks and ROCE, 2006
    • Figure 12: Utility focus on networks and ROA, 2006
    • Figure 13: Networks-focused utilities and ROA, 2006
    • Figure 14: Networks-focused utilities and ROCE, 2006
    • Figure 15: ROA for TSOs, 2006
    • Figure 16: Share beta for National Grid, 2006 to Q1 2007
    • Figure 17: Share beta for RWE, 2006 to Q1 2007
    • Figure 18: Share beta for EDF, 2006 to Q1 2007
    • Figure 19: Share beta for E.ON, 2006 to Q1 2007