Networks and value in integrated utilities

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.



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.


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DATAMONITOR VIEW 1
CATALYST 1
SUMMARY 1
ANALYSIS 2
This brief analyses data from 16 leading European utilities 2
Reliance on networks-derived revenue is not tied to a utility's size 3
The average utility derives one fifth of its revenues from networks 3
Utilities that are most reliant on network revenue tend to be gas-focused 4
Networks businesses have higher operating margins than overall utilities 5
The median operating income from a networks business unit is 31% 5
The operating margin in networks businesses is higher than for utilities overall 6
There is no consistent relationship between profitability and the proportion of a utility's business that focuses on networks 7
There is no direct relationship between the level of liberalization in a market and operating margins in utility networks businesses 8
A utility's focus on networks does not consistently drive credit ratings or debt leverage 9
There is no consistent relationship between credit ratings and the proportion of a utility's business that focuses on networks 9
There is no consistent relationship between debt leverage and the proportion of a utility's business that focuses on networks 10
There is no consistent relationship between a utility's fixed asset base and the proportion of its business that focuses on networks 11
TSOs outperform integrated utilities on ROA 12
There is a loose correlation between a utility's focus on networks and its ROCE 12
There is no relationship between a utility's focus on networks and its ROA 13
Utilities with a particularly strong focus on networks have seen a steady fall in ROA over the past five years 14
Utilities with a strong focus on networks income have seen a sharp increase in ROCE since 2005 15
TSOs have higher returns on assets than the average integrated utility 16
Networks focus reduces share price volatility, but can be eclipsed by other factors 17
National Grid's shares are less volatile than the overall stock market 17
RWE's shares are less volatile than the overall stock market 18
EDF's shares are significantly less volatile than the overall stock market 19
E.ON's shares are more volatile than the overall stock market 20
APPENDIX 21
Definitions 21
Further Reading 21
Datamonitor Consultancy 21
Ask the analyst 21
Disclaimer 21

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Figure 1: Utilities under analysis, with network business unit definitions 2
Figure 2: Network revenue as a proportion of total utility revenue, 2006 3
Figure 3: Gas versus power focus of utilities, and proportion of revenue from networks, 2006 4
Figure 4: Network operating margins, 2006 5
Figure 5: Whole utility versus networks business unit operating margins, 2006 6
Figure 6: Utility focus on networks and profitability, 2006 7
Figure 7: MCI scores and network business unit operating margins, 2006 8
Figure 8: Relationship between credit ratings and utility networks focus, 2006 9
Figure 9: Relative size of network business units and utility debt leverage, 2006 10
Figure 10: Relative size of a networks business unit and utility fixed assets, 2006 11
Figure 11: Utility focus on networks and ROCE, 2006 12
Figure 12: Utility focus on networks and ROA, 2006 13
Figure 13: Networks-focused utilities and ROA, 2006 14
Figure 14: Networks-focused utilities and ROCE, 2006 15
Figure 15: ROA for TSOs, 2006 16
Figure 16: Share beta for National Grid, 2006 to Q1 2007 17
Figure 17: Share beta for RWE, 2006 to Q1 2007 18
Figure 18: Share beta for EDF, 2006 to Q1 2007 19
Figure 19: Share beta for E.ON, 2006 to Q1 2007 20


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