EUR 850.00 For Business Accounts Only

Morningstar | Red Electrica is fully exposed to an upcopming cut in Spanish regulatory returns

Red Electrica's fully regulated electric transmission business has protected the company from the doldrums faced by most diversified European utilities since 2011. Since 2014, the beginning of the current regulatory period, Red Electrica has delivered 7% annual dividend growth, while many other European utilities had to cut their dividends to protect their balance sheets. We expect the dividend to continue growing 7% annually through the end of this regulatory period in 2019.Spain's electrical system is still facing pressure from a poorly balanced and aggressive build-out of renewable energy. In addition, a decline in Spanish government yields will weigh on allowed regulated returns. Consequently, we expect less favourable conditions during the next regulatory regime, which will start in 2020. Working in Red Electrica's favor is a regulatory provision that caps allowed return cuts to 50 basis points per year.Considering our outlook for the new regulatory regime, we expect a 1% average annual decline in 2019-22 EPS, down from a 5.6% CAGR achieved and forecast in 2013-19. A potential upside to our forecasts would be the extension of the useful life of pre-1998 assets beyond 2023 and recognition and remuneration of investments carried by Red Electrica on these assets so far.Altogether, we view the risk-reward profile of the company as unappealing, given the upcoming cut in regulated returns as of 2020. The company will likely acquire Spanish communications satellites operator Hispasat from Abertis to diversify its business profile. Still, we do not see potential for significant synergies with the group's existing businesses.