Drivers of Utility Profitability

Publication Date	August 2007
Publisher	Datamonitor
Product Type	Report
Pages	20
ISBN Number	not applicable
Product Code	DAT07173

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Summary

Introduction

As Europe's utilities increasingly expand beyond incumbent markets, a broad comparison of financial performance becomes key to understanding where and how certain utilities outperform their peers on basic financial measurements such as profitability. Historic performance, market focus, value chain focus and even sheer size all must be tested as contributing factors to utility profitability.

Scope

A review of financial performance amongst 30 leading utilities across Europe.
An analysis of potential driving factors behind profitability.
An examination of how the financial performance of 30 leading utilities has changed over time.
A review of the market focus of the best and worst performing utilities.

Highlights

Counter-intuitively, an accumulation of strong cash flows over time does not explain profitability levels in 2006. There are as many top performing utilities which saw cash flow fall from 2002 to 2006, as those which saw their level of cash flow increase over that period.

On average, the top ten most profitable utilities in 2006 derived 62% of their revenue from markets that can be described as traditional or incumbent markets, substantially less than for the most poorly-performing utilities.

Gearing levels amongst utilities do not explain why some utilities are more profitable. Endesa, for instance, has the highest level of debt-to-equity amongst the utilities examined, yet it was the seventh most profitable utility in 2006.

Reasons to Purchase

Examine the relationship between profitability and different utility characteristics.
Understand who Europe's best performing utilities are, and what distinguishes them.
Benchmark leading European utilities and a range of financial metrics.

Content

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