Abstract
Overview
Introduction
The European Commission has indicated its preference for passage of a network ownership unbundling directive in 2008. This potential highlights the issue of how networks business units perform within integarted power and gas utilities, and how valuable these business units are.
Scope
- An analysis of operating margins across a range of utilities at the level of both networks business units and the overall utiliy.
- An assessment of financial performance at those utilities which derive the highest proportion of their income from network assets.
- An examination of financial measures, from credit ratings to debt leverage, that may be explained by a utility' s focus on network assets.
- A review of share price betas for utilities with different levels of reliance on network assets.
Report Highlights
Among those utilities that publish operating information for their networks business units, operating margins are significantly higher than for the utility as a whole.
The average utility earns 21% of its revenue from its networks business, and has a debt-to-equity ratio of 57%. However, there is no consistent relationship between levels of debt leverage and the proportion of a utility' s revenue that derive from its networks business unit.
The return on capital employed of 30 leading utilities has been declining steadily since 2002. In contrast, utilities with a high proportion of their revenue flowing from networks businesses saw a turnaround in return on capital employed in 2005.
Reasons to Purchase
- Compare European utilities on the proportion of revenue and operating income that are derived from networks business units.
- Understand how a utility' s relative focus on networks affects a range of financial metrics.
- Challenge assumptions about the financial benefits that a focus on networks may provide to 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
